Construct separation for resource amount determination

ABSTRACT

A technique is provided for managing bundles of constructs that may individually fail. Each bundle has a repetitively updated resource amount for counterbalancing a transfer of a failure risk pertaining to the respective bundle. Construct data is stored and a value of the resource amount is calculated for an individual time instance based on the construct data. It is determined whether a construct of a first bundle has failed. If not, a value of a resource amount for the first bundle is calculated. If a construct has failed, a second bundle is generated that includes all constructs of the first bundle except for the construct having failed, and a value of a resource amount for the second bundle is calculated. The technique is particularly suitable for managing futures contracts that are based on a basket of credit default swaps as underlyings.

BACKGROUND OF THE INVENTION

1. Field of the Invention

The invention generally relates to data processing systems and methodsfor managing bundles of constructs that may individually fail and thathave associated a repetitively updated resource amount usable forcounterbalancing a transfer of a failure risk pertaining to therespective bundle of constructs. More particularly, the inventionrelates to data processing systems and methods for managing futurescontracts that are based on a basket of credit default swaps asunderlyings.

2. Description of the Related Art

Many techniques exist where a bundle of constructs (which mayindividually fail) is used. Constructs may be hardware arrangements incomputer systems or other automated systems, or may be softwareroutines. It is further well known in the art that even more abstractconstructs exist such as a conditional relationship between physical ornon-physical entities.

Any such construct may fail, in the sense that the task or functionassigned to that construct may not be (completely) fulfilled. Forinstance, a hardware component may break, a software routine maymalfunction or stop performing, or a condition can be rendered void orlead to negative results.

When operating a bundle of constructs that may individually fail, theoverall failure risk may depend on the individual failure probabilities.The failure risk may also change with the time. In this case, it issometimes detrimental that failure events are not exactly predictable.For this reason, the failure risk pertaining to a bundle of constructsmay be transferred to an entity that then assumes the overall failurerisk. For instance, a hardware controller or a software program mayassume the risk that one or more computer hardware or softwareconstructs may fail by stepping into the functions of these constructsin the event of a failure.

To compensate or counterbalance this transfer of a failure risk, therisk assuming entity may receive an extra resource amount. Resources mayinclude, for instance, processor access times, memory capacity, priorityover other components in the handling of tasks, etc.

Another field where such techniques can be applied is the valuation offutures contracts that are based on a basket of credit default swaps asunderlyings. Credit default swaps are the most commonly traded creditderivatives. A credit default swap is a contract where one party (the“protection seller”) receives a premium from another party (the“protection buyer”) for assuming the credit risk of a specifiedobligation. In return for this premium, the protection buyer willreceive a payment from the protection seller upon the occurrence of acredit event.

However, in all of the above techniques, the compensation is ratherdifficult to value and the bundles of constructs cannot be easilymanaged due to the complexity and rapid time variation of the variousinput parameters. The prior art techniques are therefore cumbersome andoften lead to unreliable results.

SUMMARY OF THE INVENTION

According to one embodiment, a data processing system is provided formanaging futures contracts that are based on a basket of credit defaultswaps as underlyings. The system comprises a data storage for storingcredit spread values for each credit default swap in a basket for eachindividual valuation time instance relating to the futures contract, anda calculation unit connected to the data storage for calculating a valueof a futures contract for an individual valuation time instance based onthe credit spread values. The calculation unit is arranged fordetermining a separation event of a credit default swap of a firstbasket. The calculation unit is further arranged for calculating a valueof the futures contract that is based on the first basket based on thecredit spread values if no separation event occurs. In addition, if aseparation event occurs, the calculation unit is arranged for generatinga second basket of credit default swaps comprising all credit defaultswaps of the first basket except for the credit default swap havingsuffered the separation event, and calculating a value of a futurescontract that is based on the second basket based on the credit spreadvalues.

According to another embodiment, a data processing method is providedfor managing futures contracts that are based on a basket of creditdefault swaps as underlyings. The method comprises storing credit spreadvalues for each credit default swap in a basket for each individualvaluation time instance relating to the futures contract, andcalculating a value of a futures contract for an individual valuationtime instance based on the credit spread values. The calculationcomprises determining a separation event of a credit default swap of afirst basket, calculating a value of the futures contract that is basedon the first basket based on the credit spread values if no separationevent occurs, and, if a separation event occurs, generating a secondbasket of credit default swaps comprising all credit default swaps ofthe first basket except for the credit default swap having suffered theseparation event, and calculating a value of a futures contract that isbased on the second basket based on the credit spread values.

According to yet another embodiment, a computer-readable storage mediumis provided for storing instructions that, when executed by a processor,cause the processor to manage futures contracts that are based on abasket of credit default swaps as underlyings by accessing a storagehaving stored therein credit spread values for each credit default swapin a basket for each individual valuation time instance relating to saidfutures contract, and calculating a value of a futures contract for anindividual valuation time instance based on the credit spread values bydetermining a separation event of a credit default swap of a firstbasket. If no separation event occurs, a value of the futures contractis calculated that is based on the first basket based on the creditspread values. If a separation event occurs, a second basket of creditdefault swaps is generated comprising all credit default swaps of thefirst basket except for the credit default swap having suffered theseparation event, and a value of a futures contract is calculated thatis based on the second basket based on the credit spread values.

According to a further embodiment, a data processing system is providedfor managing bundles of constructs that may individually fail. Eachbundle of constructs is associated with a repetitively updated resourceamount usable for counterbalancing a transfer of a failure riskpertaining to the respective bundle of constructs. The system comprisesa data storage for storing construct data for each construct in a bundleof constructs for distinct individual time instances, and a calculationunit connected to said data storage for calculating a value of theresource amount for an individual time instance based on the constructdata. The calculation unit is configured to determine whether aconstruct of a first bundle of constructs has failed. If none of theconstructs in the first bundle of constructs has failed, the calculationunit is further configured to calculate a value of a resource amountusable for counterbalancing a transfer of a failure risk pertaining tothe first bundle of constructs based on the construct data. Further, ifa construct of the first bundle of constructs has failed, thecalculation unit is configured to generate a second bundle of constructscomprising all constructs of the first bundle of constructs except forthe construct that failed, and calculate a value of a resource amountusable for counterbalancing a transfer of a failure risk pertaining tothe second bundle of constructs based on the construct data.

According to still a further embodiment, a data processing method isprovided for managing bundles of constructs that may individually fail.Each bundle of constructs is associated with a repetitively updatedresource amount usable for counterbalancing a transfer of a failure riskpertaining to the respective bundle of constructs. The method comprisesstoring construct data for each construct in a bundle of constructs fordistinct individual time instances, and calculating a value of theresource amount for an individual time instance based on the constructdata. The calculation comprises determining whether a construct of afirst bundle of constructs has failed, calculating a value of a resourceamount usable for counterbalancing a transfer of a failure riskpertaining to the first bundle of constructs based on the construct dataif no construct of the first bundle of constructs has failed, and, if aconstruct of the first bundle of constructs has failed, generating asecond bundle of constructs comprising all constructs of the firstbundle of constructs except for the construct having failed, andcalculating a value of a resource amount usable for counterbalancing atransfer of a failure risk pertaining to the second bundle of constructsbased on the construct data.

According to still another embodiment, a computer-readable storagemedium is provided for storing instructions that, when executed by aprocessor, cause the processor to manage bundles of constructs that mayindividually fail, where each bundle of constructs is associated with arepetitively updated resource amount usable for counterbalancing atransfer of a failure risk pertaining to the respective bundle ofconstructs. A storage storing construct data for each construct in abundle of constructs for distinct individual time instances is accessed.A value of the resource amount is calculated for an individual timeinstance based on the construct data by determining whether a constructof a first bundle of constructs has failed. If no construct of the firstbundle of constructs has failed, a value of a resource amount usable forcounterbalancing a transfer of a failure risk pertaining to the firstbundle of constructs based on the construct data is calculated. If aconstruct of the first bundle of constructs has failed, a second bundleof constructs is generated comprising all constructs of the first bundleof constructs except for the construct having failed, and a value of aresource amount usable for counterbalancing a transfer of a failure riskpertaining to the second bundle of constructs based on the constructdata is calculated.

BRIEF DESCRIPTION OF THE DRAWINGS

The accompanying drawings are incorporated into and form a part of thespecification for the purpose of explaining the principles of theinvention. The drawings are not to be construed as limiting theinvention to only the illustrated and described examples of how theinvention can be made and used. Further features and advantages willbecome apparent from the following and more particular description ofthe invention, as illustrated in the accompanying drawings, wherein:

FIG. 1 illustrates a data processing system according to an embodimentof the invention; and

FIG. 2 illustrates a corresponding data processing method according toan embodiment of the invention.

DETAILED DESCRIPTION OF THE INVENTION

The illustrative embodiments of the present invention will be describedwith reference to the figures wherein like elements and structures areindicated by like reference numbers. Further reference is made to theglossary of terms at the end of the present description.

In the following, embodiments will be described with respect to futurescontracts that are based on baskets of credit default swaps asunderlyings. However, it is noted that generally, a data processingsystem 100 is provided for repetitively determining a resource amountfor counterbalancing the transfer of a failure risk pertaining to abundle of constructs that may individually fail.

The system comprises a data storage 110-130 for storing credit spreads,event data, and weights in steps 200-220, and a calculation unit 140 forcalculating the contract value in step 240. These functions will becomemore apparent from the detailed description below.

Several aspects of the embodiments, and the differences to existingfinancial instruments, can be summarized as follows. The embodiments (i)provide an exchange traded credit instrument, (ii) allow the user toassume pure credit risk, (iii) enable defined default payments (whichmay be binary), (iv) allow for a gradual symmetrical settlement ofchanges in credit quality, (v) provide for a cash settlement of adefault swap after a credit event, (vi) provide for physical settlementof a default swap after a credit event, (vii) allow separating namesthat have suffered severe creditworthiness deterioration from theexisting index, (viii) allow the user to assume credit risk frommultiple sources, (ix) provide future contracts of reduced notional, and(x) allow the user to eliminate the risk of correlation between thecreditworthiness of a reference obligor and an OTC counterparty thatsells protection. These features will now be described in more detailaccording to preferred embodiments.

-   -   (i) The contract may be exchange traded. In contrast, all        conventional products that give an exposure to credit risk in        isolation of other risks (e.g. interest rate risks) are OTC        (over-the-counter) products.

There are many advantages to users of listing a credit derivativeproduct on an exchange. For example, deal cost is reduced, pricetransparency improves and contracts become more standardized. Also,there is likely to be greater liquidity on an exchange, and counterpartycredit risk will be reduced. In addition, trades can be executed withsmaller deal sizes on an exchange than is possible in the OTC market.This is advantageous to institutions that desire to hedge credit riskhaving a notional size that is not a multiple of $1,000,000 or

1,000,000.

Furthermore, many potential users are prohibited from trading in OTCderivatives, but are allowed to trade listed instruments. Currently suchusers can only assume exposure to the credit markets by trading bonds.

-   -   (ii) The contract may have very low interest rate sensitivity.        The user may then be able to assume credit risk in isolation        from interest rate risk.

The asset swap market does not allow pure credit risk to be assumedwithout also assuming credit contingent interest rate risk. In the assetswaps market changes in credit spread are monetized using offsettinginterest rate swaps. Interest rate swaps do not terminate in the eventof a credit event.

Trading fixed rate bonds does not allow pure credit risk to be assumed,and a fixed rate bond's value contains an element due to credit risk andan element due to interest rate risk. Also, a view on increasing creditspreads can only be monetized by shorting a bond, in the repo market.The cost of shorting a bond is therefore a function of the repo rate,and the behavior of this rate is complex and is not closely related tothe credit markets.

-   -   (iii) The contract of the present embodiments allows payment of        a fixed pre-specified amount LGD (Loss Given Default) following        a credit event. Because the LGD may be pre-specified on the        futures launch date, there is no uncertainty over the amount        that the underlying default swap will pay on default.

In contrast, the OTC credit default swaps settle with reference to theactual recovery rate which is observed after the credit event. It is notpossible to observe this recovery rate prior to a credit event.Therefore, the payments made by an OTC default swap after a credit eventcannot be determined in advance. Furthermore, the value of a defaultswap is a function of the assumed recovery rate. As the recovery ratecannot be observed, the valuation of the default swap can only bedetermined to the accuracy of the recovery rate estimate.

Similarly, in the asset swap market, the swap fixed rate payer continuesto own the bond after a credit event. Therefore, the loss experienced isa function of that bond's recovery rate. Furthermore, it may bedifficult for the bond holder to sell the bond quickly after a creditevent meaning that a holder of an asset swap may not be able to avoidhaving to wait for the liquidation process to be finalized. This is alsothe position of a credit default swap protection seller, who after acredit event, receives the defaulted bond and must wait for theliquidation process to be finalized.

-   -   (iv) In the scenario where an obligor's credit spread widens        over several days prior to the obligor defaulting, the contract        of the present embodiments allows the gradual settlement of the        default payment, i.e. the default payment may be settled every        day as the credit spread widens to default.

Gradual settlement of the default payment reduces the exchange'sexposure to the protection seller on the day of the credit event, as theprotection seller does not need to settle the entire LGD amount all atonce.

An OTC market default swap that is cash collateralized may allow adefault payment to be gradually settled, if the party that buysprotection makes regular margin calls on the seller of protection (basedon the present value of the default swap). However, such gradualsettlement of default payments is asymmetrical—it only applies when themargin payer (e.g. a customer of a bank) is out of the money. Forexample, if Bank X sells protection to Fund Y and the default of thereference obligor starts to look likely, Fund Y will not in practice beable to call margin from Bank X, although if spreads tighten so thatBank X comes into the money, Bank X may realistically call margin fromFund Y.

Furthermore, a total return swap (‘TRS’) allows the periodic (e.g.quarterly) settlement of changes in value caused by the deterioration ofa reference obligor's creditworthiness. However, the TRS is not a purecredit instrument as it carries both interest rate risk and credit risk.

Therefore, no currently traded pure credit instrument permits thegradual and symmetric settlement of a credit event.

-   -   (v) After a credit event, the contract of the present        embodiments may cash settle. The OTC default swap market settles        credit events physically, through the delivery of a defaulted        bond. Furthermore, although the cash settlement option exists in        the OTC default swap market, it is rarely exercised due to        complexities in determining the recovery value of a defaulted        obligor's debt. From a practical perspective, OTC default swaps        are rarely able to be cash settled in a practical manner.

Physical settlement has many disadvantages to users. When arestructuring credit event is triggered, each of the availabledeliverable obligations with a different maturity will have a differentmarket value. Therefore, there will be a ‘cheapest to deliver’deliverable obligation. Demand for this particular obligation can skewrecovery prices. Also, lenders who hedge loans with default swaps arereluctant to deliver the loan after a credit event because suchtransfers are likely to lead to a deterioration in the lender-borrowerrelationship. Accounting, regulatory and legal constraints prevent thedelivery of certain obligation types and some obligations are notpermitted as deliverables by the ISDA documentation. Also, someinstitutions legally may not take delivery of certain types ofobligation—for example some corporations (including insurers) cannot ownloans. Finally, there is a general reluctance to deliver defaultedobligations as some protection buyers desire to retain recourse in theevent of the eventual winding up of the company.

In summary, physical settlement is very complex. Such complexity makesit more difficult for new institutions to enter the OTC creditderivatives market. A default swap based contract that cash settles in avery simple manner after a credit event will facilitate such users'entry into the credit markets.

-   -   (vi) In addition to, or as an alternative for, cash settlement,        the present embodiments may allow separating a name that has        suffered a separation event from an existing index by the        creation of two new contracts: a new index of non-defaulted        names and a contract based on the failed name. This allows        trading on the non-defaulted index names and the failed name as        two separate contracts.

This separation mechanism is highly advantageous to users of theinventive futures contract as it preserves liquidity in the contractbased on non-failed names.

As will be described in more detail below, the margining and quotationof the contracts might also differ from the time the separation hastaken place.

Presently, there is no exchange traded futures contract, which dealswith failure events (which might include credit events). Additionally,there is currently no exchange traded futures contract which allows forthe separation into two separate contracts with different quotation andvaluation mechanisms while reflecting the original value of theposition.

-   -   (vii) Not withstanding the complexity of physical settlement in        case of a credit event, a futures contract could also be        designed to provide for such physical settlement.

At the time a credit event has to be settled the protection seller ofthe defaulted reference obligor gets a credit reference obligationsdelivered from the protection buyer with the respective nominal(currently traded at expected recovery value in the market) and pays afixed price of 100% of the delivered nominal. The net result for both isequivalent to a LGD payment, i.e. 100−recovery value.

The protection seller incurs a net loss equivalent to the LGD paymentand the protection buyer receives a default compensation equivalent tothe LGD payment.

Such a mechanism avoids the necessity of determining a LGD fixing for adefaulted name. Since the determination of a LGD can be very difficultand controversial, the physical settlement of a credit event could beadvantageous.

-   -   (viii) The contract of the present embodiments allows the user        to assume credit risk for an index of several obligors.

Currently it is difficult for credit market participants to quicklymonetize a general view of the credit markets, or a view of an index ofsources of credit risk. For example, in the asset swap and OTC defaultswap markets, a general view on the credit markets can only be executedby entering into a large number of single name specific instruments,necessitating a credit analysis of each individual name. Smallerinstitutions may have insufficient skill or resources to perform such ananalysis, even though they may have skill in analyzing the generalcredit markets.

Several structured products, notably collateralized debt obligations(“CDOs”), are linked to a broad index of obligors. However, there islittle transparency over CDO pricing, some modeling inputs areunobservable, and highly complex models are required to value the note(which few institutions possess). Furthermore, the market in structurednotes is both illiquid and one sided (for example it is difficult toshort sell a CDO). Also, many investors are prohibited from trading instructured products. Therefore, there are substantial reasons whystructured notes and CDOs are not suitable for many users.

Furthermore, where an institution wishes to build up a large diversifiedexposure to the credit risk of a large number of obligors, the length oftime needed to build up the portfolio (which must be constructed name byname) can alert the market so that prices move against the institution.For example, if an institution attempts to purchase protection on alarge diversified portfolio by entering into single name default swaps,credit spreads in general are likely to rise, so that it becomes morecostly to buy the desired portfolio. The contract of the presentembodiments would allow large diversified credit exposures to be builtup through only one trade, eliminating the losses due to marketfeedback. In addition, a number of structured financial products basedon credit indices are now emerging and are improving participants'abilities to take exposure to the credit markets as a whole.

-   -   (ix) The mechanics of the contract of the present embodiments        may require that the notional reduces after each credit event.        This mechanism may allow users to assume the credit risk of an        index of obligors.

Existing futures contracts have fixed notional sizes.

-   -   (x) The contract of the present embodiments allows a user to        obtain credit protection without being exposed to the failure        risk of the protection seller. In the OTC credit default swap        market, the correlation between the creditworthiness of the        protection seller and the reference obligor must often be        considered. For example, credit protection purchased from a        Korean Bank where the reference obligor is a large Korean        Industrial company will be less effective credit protection than        protection on the same obligor purchased from a large US bank.        This is because the similar obligors (e.g. the Korean bank and        Korean Industrial) may be dependent in some way, or may default        due to a single shared risk.

Going now into some detail in describing a first embodiment, an indexmay be defined on the first trading day of the futures contract. Theindex may initially consist of N obligors, each of which is liquidlytraded in the credit markets (e.g. the default swap market) so thecredit spread of each obligor is observable.

The futures contract of the present embodiment is based on the presentvalue of an underlying credit default swap. At any time, the notional ofthe default swap is deemed to be the contract notional multiplied byΣn_(i), where n_(i) is the weight of the i^(th) obligor in the index,and where the sum is only taken over the obligors in the index that havenot suffered a credit event by that time. The default swap may mature ata fixed date (e.g. 5 years) after the maturity of the futures contract.

In the present embodiment, the appropriate credit spread for valuationof the default swap is the average credit spread of the obligors in thebasket that have not suffered a separation event. In one embodiment,average is defined as arithmetic average, but in another embodiment,average may also be a weighted average.

Following a failure event on the i^(th) obligor in the index, thefutures contract separates into two contracts: a futures contract basedon a credit default swap based on the non-separated names, and a futurescontract based on a credit default swap based on the separated name.Each of these contracts may be traded separately. Furthermore, multipleseparations may occur, so that there may be a number of futurescontracts each based on one separated obligor, and one futures contractbased on the remaining non-separated obligors. Each of these contractsmay trade independently of the others.

Some time may elapse between a separation event and a credit event.During this period, the contract based on the separated name willcontinue to trade on the futures exchange. It may be understood that themarket price of this contract may reflect the market view of the likelyvalue of LGD. The market value may be calculated by reference to acredit spread and the CDS formula (1), or estimates of the value of LGDmay be traded directly (without the use of any formula). The marketestimate of LGD, and thus the futures price, will change from time totime.

At some point in time following a credit event on the i^(th) obligor inthe index, the value of the default swap will be determined/fixed at adefined amount, LGD·n_(i), the present embodiment. One final variationmargin payment is made to reflect the fixing of LGD. Following thisfinal variation margin payment, the credit default swap on the obligorhaving suffered a credit event terminates. The same effect may beachieved by physically settling the obligations arising out of a creditevent. Rather than a final variation margin payment of LGD·n_(i), theprotection seller is paying n_(i) and gets from the protection buyer adefined reference obligation of the reference obligor with a nominalvalue of n_(i) delivered.

The protection buyer may pay for credit protection at the end of eachday for all obligors that had not suffered a credit event on the closeof the prior trading day.

For each and every obligor, credit events may be defined using thestandard ISDA architecture. While not limited to these examples, theactive credit events may be bankruptcy and failure to pay only. It is tobe noted that the invention is likewise applicable to any other kind ofcredit events.

The present embodiment allows for daily payments of variation margins.The daily margin movements of the futures contract are then intended toclosely replicate daily changes in the present value of a portfolio of Nsources of credit risk as described above. Daily payments may beembodied to reflect the change in present value due to: (i) theevolution of the average survived credit spread during a trading day;(ii) the effect of a credit event (e.g. bankruptcy) occurring; and (iii)the protection buyer's payment for each day's credit protection.

The payment to reflect the evolution of the average survived creditspread and the occurrence of credit events according to the presentembodiment will now be described in more detail. On each day, theprotection seller may pay to the protection buyer the total of thefollowing amounts (expressed for initial notional of the contract ofone, i.e. unity),

for a futures contract based on the main bundle of default swaps:N_(today)·CDS(CS_(average, today), CS_(average, initial), S_(today),T_(today))−N_(yesterday)·CDS(CS_(average, yesterday),CS_(average, initial), S_(yesterday), T_(yesterday))  (1)

for one or more futures contract(s) based on each separated defaultswap:

$\begin{matrix}\begin{matrix}(i) & {{+ {\sum{n_{i} \cdot {{CDS}\left( {{CS}_{i,{today}},{CS}_{{average},{initial}},S_{today},T_{today}} \right)}}}} -} \\\; & {\mspace{20mu}{\sum{n_{i} \cdot {{CDS}\left( {{CS}_{i,{yesterday}},{CS}_{{average},{initial}},S_{today},T_{today}} \right)}}}} \\({ii}) & {- {\sum{n_{i} \cdot {LGD}_{i}}}}\end{matrix} & \left( 1^{\prime} \right)\end{matrix}$

It is noted that the separated contracts develop a life of their own,i.e. they can be traded in their own right, and ownership can change aswell with such trading activity.

With regard to futures contracts based on separated default swaps (i.e.on obligors that have suffered a separation event): the first summationis taken over the obligors that suffered a separation event or creditevent at any time prior to the close of today's trading day but forwhich the value of LGD has yet to be determined. The second summation istaken over the obligors that suffered a separation event at any timeprior to the close of yesterday's trading day, but for which the valueof LGD has yet to be determined. The third summation is taken overobligors that have suffered a credit event and where the value of LGDwas determined on the trading day. In expression (1′), note that thevalue of any futures contract based on an obligor having suffered aseparation event may either be calculated using a credit spread and theCDS formula, as shown in lines 1 and 2 of expression (1′), or, may beestimated directly by the market. In this latter case, lines 1 and 2 ofexpression (1′) may be taken to mean the market price (e.g. in Euros ordollars) for each separated default swap on today and yesterday,respectively. In case of physical settlement of a credit event line 3 ofexpression (1′) can be economically substituted by the process of thephysical delivery of a reference obligation of the defaulted referenceobligor against payment of 100% of the nominal of the deliveredreference obligation. Terms in expressions (1) and (1′) have thefollowing meanings:

-   -   (i) N_(today) is the weight due to the obligors surviving (i.e.        not having cumulatively suffered a separation event) after the        close of trading day;    -   (ii) N_(yesterday) is the weight due to the obligors surviving        (i.e. not having cumulatively suffered a separation event) after        the close of the prior trading day;    -   (iii) CS_(average, today) is the average credit spread at the        end of the day, averaged over the obligors that have survived at        the end of the day;    -   (iv) CS_(average, yesterday) is the average credit spread at the        end of yesterday, averaged over the obligors that survived at        the end of the prior trading day;    -   (v) CS_(average, initial) will be the average credit spread of        all obligors in the index at the time the futures contract was        launched;    -   (vi) CS_(i, today) is the credit spread of the i^(th) obligor at        the end of the day;    -   (vii) CS_(i, yesterday) is the credit spread of the i^(th)        obligor at the end of yesterday;    -   (viii) S_(today) is the (e.g. linearly) interpolated swap rate        for maturity T on the valuation day;    -   (ix) S_(yesterday) is the (e.g. linearly) interpolated swap rate        for maturity T on the prior valuation day;    -   (x) T_(today) is the maturity of the notional CDS contracts,        i.e. 5 years plus the time remaining until the futures contract        matures; and    -   (xi) T_(yesterday) is the maturity of the notional CDS contracts        as measured on the last trading date.

In the definitions shown above, the indication “yesterday” means thefutures trading date preceding today.

The present embodiment may further provide for deducing the value of theunderlying default swap. When defining the functional expression CDSwith its operands to be:CDS(current credit spread, strike credit spread, swap rate,maturity)  (2)

A generic formula may be used which has the property that its output isa number that is close to the clean present value of a credit defaultswap. There may be several such formulas which could be used in generalprior to credit events. In the present embodiment, CDS is defined asfollows:

$\begin{matrix}{{CDS} = \frac{\left( {{CS}_{current} - {CS}_{initial}} \right) \cdot \left( {1 - {\mathbb{e}}^{{- {({h + r})}} \cdot T}} \right)}{h + r}} & (3)\end{matrix}$

In this equation,h=CS _(current) ·DCF/(1−recovery)  (4)r=ln(1+S)  (5)

Equation (3) provides a simple but accurate means of calculating thepresent value of a default swap prior to the occurrence of a creditevent. The derivation of this equation, and the meaning of theparameters in the equation, is provided in more detail below.

The value of a credit default swap after the occurrence of a creditevent is given by the net amount paid by the protection seller to theprotection buyer after a credit event, i.e. the par value of a bond(e.g. $100) minus the recovery rate of a bond having suffered a creditevent. The ‘loss given default’ amount is labeled LGD. LGD_(i) is thedefined payment per unit notional paid to the protection buyer followinga credit event suffered by obligor i. For the initial determination ofthis parameter, see below. The recovery rate in equation (4) may be usedto initially determine the value of LGD.

Separation events are defined as an event indicating the deteriorationof an obligor's creditworthiness, and are defined by the futurescontract. Separation events can include, but are not exclusively definedas, credit events (which are themselves usually defined by marketdocumentation, such as the ISDA 2003 Standard Credit Default SwapConfirmation). Therefore, it would be possible for a separation event(such as a large increase in an obligor's credit spread) to occur priorto a credit event (e.g. that obligor's subsequent bankruptcy).Conversely, separation events could be exclusively defined as creditevents, meaning that the separation event and credit event occursynchronously.

Under the present embodiment, a default payment of LGD_(i) is made whenobligor i suffers a credit event, and at the date that the value of LGDis formally determined in accordance with the futures contractdocumentation. LGD may for instance, be defined to be a fixedpre-specified amount with a binary character, so that the notional ofthe defaulted obligor multiplied by a loss factor LGD is the size of thecash flow that may be paid to the protection buyer after a credit event.Therefore, in this instance, no recovery rate uncertainty arises in thefutures contract (in contrast to OTC default swaps). In contrast, LGDcould be determined by some other means, to be specified by the futurescontract. These other means could include determination by a dealer pollafter the credit event, or by the market price behavior of the futurescontract based on the name having experienced a credit event. The dateof determination of the value of LGD is likely to be later than the dateof the credit event.

In the period immediately prior to the date of determination of the LGD,if there has already been a failure event, the value of the separateddefault swap may be a market estimate of LGD. This estimate may beexpected to vary with market perception from day to day, resulting in a(small) variation margin payment. The fixed determination of LGDdescribed in the above paragraph takes place after the occurrence of thecredit event. After the final variation margin payment (immediatelyafter the fixing of the value of LGD), the default swap linked to thedefaulted obligor may be eliminated and may result in no furthercontributions to futures cash flows being made for the remaining life ofthe future. In case of a physical settlement of the obligation resultingout of a credit event, the final LGD payment is substituted by thephysical delivery of the reference obligation against payment of 100% ofthe nominal of the delivered reference obligation.

It is to be noted that for dates where there are no failure events,N_(today)=N_(yesterday) and the default payment is zero for that day. Onsuch days, cash flows may only reflect the change in present value ofthe notional default swaps arising from the evolution of the averagecredit spread during the day.

It is also to be noted that for dates where a failure event occurs,assuming that there is no change in the credit spreads of the names inthe basket, there should be a zero net variation margin. In other words,the bifurcation of the initial basket following a failure event doesnot, by itself, cause the total value of the futures contracts tochange. In expression (1), the summation should equal the summation oflines 1 and 2 of expression (1′) on days where a separation eventoccurs, but where credit spreads do not alter. I.e. the total value ofthe futures contracts (both based on the main bundle and, separately, onany separated names) does not change due to separation unless creditspreads evolve.

The present embodiment further provides for reducing the notional. Thefutures contract notional based on the average of the non-separatedcredit default swaps may decay by n_(i) (for contracts with an initialnotional size of one) after obligor i suffers a separation event.

Payment may be made in the present embodiment for each day's creditprotection. At the end of each day, the buyer of protection may beobliged to pay for that day's credit protection on the names that hadnot suffered a credit event by the close of that trading day. Protectionmay be paid on names that have not suffered a credit event, but thathave suffered a separation event (in cases where a separation event isdeemed to occur prior to a credit event). In this context, ‘defaults’refer to credit events only. It is noted that defaults may be announcedafter the close of trading on each trading day. Therefore, at the end ofeach day, the buyer of protection may be obliged to pay to the seller ofprotection the following amount (expressed for initial notional of thecontract of one),

for a futures contract based on the main bundle of default swaps:N_(today)·CS_(average, initial)·DC  (6)

for one or more futures contract(s) based on each separated default swap(each swap with notional n) providing that default swaps have notsuffered credit events:Σn_(i)·CS_(average, initial)·DC  (6′)

For clarity, premium is not paid for obligors that have suffered acredit event even if the value of LGD has yet to be determined. Premiumis paid for obligors that have not suffered a credit event, even if theyhave suffered a separation event.

In this expression, DC is a daycount used to calculate the premium duein one day. For example, if the daycount convention is “act360” then DC=1/360, as the daycount convention assumes that there are 360 days in ayear for the purpose of calculating interest cash flows. Other daycountconventions exist.

Weekend credit protection may be paid for at the close of the precedingFriday, i.e. protection buyers may pay for Saturday's and Sunday'sprotection at the end of the Friday. Further, where the next calendarday is not a trading day, protection for that day may be paid at the endof today—i.e. not only weekends, but also holidays.

Regarding the source of inputs, it may only be necessary to source thefollowing inputs in order to calculate daily margin payments and valuethe futures contract: the average credit spread for the survivedobligors in the index at the close of the day; the average credit spreadfor the survived obligors in the index at the close of the prior day;the average credit spread on the launch date of the futures contract;the swap rate for maturity T; the identity of obligors that suffered aseparation event and/or a credit event during the day; and the creditspread of obligors having suffered a separation event but not havingsuffered a credit event at the close of the day. If T is an unquotedmaturity, the swap rate may be obtained using a generally acceptedinterpolation technique. If separated contracts are quoted as a functionof the estimated LGDs, the daily margin payments for such contracts arebased on the traded prices of such contracts as input parameter.

The futures contract may further specify a means of provision of inputs.The swap rate may for instance be obtained from the ISDA swap fixingquoted on each trading day. Each day's average credit spread for thesurvived obligors and LGD estimates for separated contracts may bedetermined either (i) by polling a number of leading credit derivativemarket markers, then eliminating bad data, or (ii) from well regardedcredit derivative information providers, or (iii) through the price orspread behavior of the futures markets.

The determination of the type and date of separation events and creditevents may be done by a respected independent party whose decision onwhether a credit event has occurred on any day is then binding on allfutures holders. Separation events and credit events may be announcedafter the close of trading on each credit day. The determination agentmay either be a trade organization, or a panel of leading banks and lawfirms, or a suitably qualified third party.

While the embodiment described above bases the contract valuation on adefault swap which is calculated from an average spread, there may befurther alternative embodiments. For instance, the valuation may bebased on the sum of the time dependent values for each individualdefault swap. This will now be described in more detail.

In this embodiment, the futures contract is based on the total presentvalue of N credit default swaps, where there is a credit default swap oneach obligor in the index. The i^(th) default swap may have notionalequal to the total contract notional multiplied by n_(i), where n_(i) isthe weight of the i^(th) obligor in the index. The default swap maymature at a fixed date (e.g. 5 years) after the maturity of the futurescontract.

In this embodiment, default swaps that have not suffered a separationevent are bundled together. Following a separation event, the relevantdefault swap separates from the main bundle default swaps to enabletrading in the main bundle of default swaps to remain liquid. Tradingthen continues separately on both the main bundle of non-separateddefault swaps, and on individual separated default swaps. Each creditdefault swap, whether separated or not, but that has not suffered acredit event, may be separately valued using the currently observablecredit spread and the initial credit spread (observed at the futureslaunch date) of the relevant obligor. In case a separated contract isquoted based on LGD estimates, market LGD estimates are used forvaluation.

At a time that may be equal to or following the occurrence of a creditevent on the i^(th) obligor in the index, the default swap may pay adefined amount, LGD·n_(i). After this payment, the default swap linkedto the defaulted obligor may be eliminated and may make no furthercontributions to futures cash flows for the remaining life of thefuture. In case of a physical settlement of the obligation resulting outof a credit event, the final LGD payment is substituted by the physicaldelivery of the reference obligation with a nominal of n_(i) againstpayment of 100% of the nominal n_(i) of the delivered referenceobligation.

At the end of each day, the protection buyer may pay for creditprotection on each default swap that has not suffered a credit event,i.e. the payment for credit protection is not made if an obligor hasdefaulted. Protection payments may be made where a separation event butnot a credit event has occurred. For each individual default swap, thedaily payment of premium may be derived from the initial credit spreadof the relevant obligor on the futures launch date.

Given this embodiment, expressions (1) and (1′) read as follows,

for a futures contract based on the main bundle of default swaps:Σ[n_(i, today)·CDS(CS_(i, today), CS_(i, initial), S_(today),T_(today))]−Σ[n_(i, yesterday)·CDS(CS_(i, yesterday), CS_(i, initial),S_(today), T_(today))]  (1a)

for one or more futures contract(s) based on each separated defaultswap:Σ[m_(i, today)·CDS(CS_(i, today), CS_(i, initial), S_(today),T_(today))]−Σ[m_(i, yesterday)·CDS(CS_(i, yesterday), CS_(i, initial),S_(today), T_(today))]+Σ(w_(i)·LGD_(i))  (1′a)

where:

-   -   (i) n_(i) refers to the obligors that have not suffered a        separation event;    -   (ii) m_(i) refers to the obligors that have suffered a        separation event and/or a credit event, but for which the value        of LGD has not been fixed;    -   (iii) w_(i) refers to the notional of obligors suffered a credit        event for which the value of LGD was determined in accordance        with the futures contract documentation on the trading day;    -   (iv) CS_(i, today) is the credit spread of the ith obligor at        the end of the day;    -   (v) CS_(i, yesterday) is the credit spread of the ith obligor at        the end of yesterday; and    -   (vi) CS_(i, initial) is the credit spread of the ith obligor at        the launch of the futures contract.

As with the first embodiment, the default payment is zero for dateswhere there are no determinations of LGD values. Such days werecharacterized by N_(today)=N_(yesterday) in the first embodiment, andare characterized by n_(i, today)=n_(i, yesterday) in the presentembodiment. On such days, cash flows may only reflect the change inpresent value of the notional default swaps arising from the evolutionof the individual credit spreads during the day. In case of physicalsettlement of a credit event, line 3 of expression (1′a) can beeconomically substituted by the process of the physical delivery of areference obligation of the defaulted reference obligor against paymentof 100% of the nominal the delivered reference obligation.

Further, the notional of the futures contract based on the bundle ofnon-separated obligors may decay in the first embodiment by n_(i) (forcontracts with an initial notional size of one) after obligor i suffersa separation event.

In the present embodiment, the daily premium payment made by theprotection buyer (shown as expressions (6) and (6′) in the priorembodiment) is,

for a futures contract based on the main bundle of default swaps:Σn_(i, today)·CS_(i, initial)·DC  (6a)

for one or more futures contract(s) based on each separated defaultswap:Σu_(i, today)·CS_(i, initial)·DC  (6′a)

In the last summation, u_(i) refers to the notional of default swapsthat have not suffered a credit event by the close of that trading day,but that have suffered a separation event.

Referring now to the sources of inputs described above, the presentembodiment may require the following data: the credit spread for each ofthe survived obligors in the index at the close of the day; the creditspread for each of the survived obligors in the index at the close ofthe prior day; the credit spread for each obligor on the launch date ofthe futures contract; the swap rate for maturity T (which if T is anunquoted maturity, the swap rate will be obtained using a generallyaccepted interpolation technique); and the number and identity ofobligors that suffered a credit event during the day. The identity ofobligors that suffered a separation event during the day may only benecessary to determine which non-separated default swaps should bebundled together, and which default swaps should be separated from themain bundle, for trading purposes; the identity of failed default swapsdoes not cause the variation margin payments to change.

Referring again back to the CDS expression (3) shown above, thisreplication formula may be derived as follows for all of the embodimentsdescribed above.

The clean price of a credit default swap prior to a credit event can beaccurately approximated by the following equation:

$\begin{matrix}{{CDS} = \frac{\left( {{CS}_{current} - {CS}_{initial}} \right) \cdot \left( {1 - {\mathbb{e}}^{{- {({h + r})}} \cdot T}} \right)}{h + r}} & (7)\end{matrix}$

In this equation, h may be calculated by equation (4). In equations (3),(4) and (7),

-   -   CS_(initial) is the credit spread on the date that the default        swap was entered into or at the time the futures contract was        listed;    -   (ii) CS_(current) is the current credit spread used to value the        credit default swap or futures contract;    -   (iii) recovery is the expected value (proportional to the par        value) of the obligor's debt post credit event;    -   (iv) T is the remaining maturity of the default swap; and    -   (v) DCF is the daycount fraction for the default swap (for        instance 365/360).

The value of r may be given by:

$\begin{matrix}{r = \left\{ \begin{matrix}{\ln\left( {1 + S_{1}} \right)} & \text{if~~the~~swap~~rate~~is~~quoted~~on} \\\; & \text{an~~annual~~basis} \\{\ln\left( {1 + {S_{2}/2}} \right)}^{2} & \text{if~~the~~swap~~rate~~is~~quoted~~on} \\\; & \text{a~~semi-annual~~basis}\end{matrix} \right.} & (8)\end{matrix}$

where

-   -   (i) S₁ is the annually compounded swap rate for maturity T        years; and    -   (ii) S₂ is the semi-annually compounded swap rate for maturity T        years.

The CDS value according to equation (7) represents the present value ofa credit default swap held by a buyer of protection where the creditspread moved from CS_(initial) to CS_(current) between the date thatprotection was bought and the valuation date. Alternatively, if the CDSvalue is negative, this is the amount that must be paid today by thebuyer of protection to cancel the default swap.

It is to be noted that the present value of CDS with T years remaining,paying a premium of CS_(initial) with a current credit spread ofCS_(current) may be identical to the difference in present valuebetween:

-   -   (i) CDS_(i) which is a bought protection CDS paying CS_(initial)        with maturity T; and    -   (ii) CDS_(ii) which is a sold protection CDS paying CS_(current)        with maturity T.

This is because CDS_(ii) is the cost to hedge CDS_(i). The net cashflows ofCDS_(i)−CDS_(ii)  (9)

may consist of receiving an amount of(CS_(current)−CS_(initial))·(daycount fraction)  (10)

on each premium date, until the earlier of the CDS maturity date or thedefault date. “Daycount fraction” in the above equation means thefraction of the year in which the premium accrues, e.g. if the premiumis paid twice a year, “daycount fraction” would be 0.5. Regardless ofthe default date, default payments of (1−recovery) are hedged betweenCDS_(i) and CDS_(ii). In addition, on default, the accrued premium duefor the period starting on the prior premium date and ending on thedefault date must be paid by the buyer of protection to the seller ofprotection. Therefore, it may be assumed that the credit spreaddifferential is paid approximately continuously.

The today's present value of the credit spread differential δV thataccrues between times t and t+δt, may be given by:δV=(CS _(current) −CS _(initial))·δt·e ^(−r·t) ·PrS(t)  (11)

In this equation,

-   -   (i) (CS_(current)·CS_(initial))·δt is the cash flow due for the        period of δt;    -   (ii) PrS(t) is the probability of survival of the obligor until        time t;    -   (iii) r is a constant interest rate which can be used to derive        risk free discount factors that are appropriate for discounting        cash flows occurring between t=0 and t=T;    -   (iv) e^(−r·t) is the risk free discount factor for time t        assuming continuous discounting; and    -   (v) DCF is a daycount fraction, for instance 365/360.

PrS(t) may be given byPrS(t)=e ^(−CS·DCF·t/(1−recovery)) =e ^(−h·t)  (12)

The result is thenδV=(CS _(current) −CS _(initial))·e ^(−(r+h)·t) ·δt  (13)

where h is given by equation (4).

Equation (13) gives the present value of the default swap that arisesfrom the small unit of time between t and t+δt. The total value of theCDS may then be calculated by integrating δV between the valuation dateand the maturity of the CDS, i.e. over the time interval from 0 to T:

$\begin{matrix}{V = {\int_{0}^{T}{{\left( {{CS}_{current} - {CS}_{initial}} \right) \cdot {\mathbb{e}}^{{- {({r + h})}} \cdot t}}{\mathbb{d}t}}}} & (14)\end{matrix}$

This equation leads to

$\begin{matrix}{V = \frac{\left( {{CS}_{current} - {CS}_{initial}} \right) \cdot \left( {1 - {\mathbb{e}}^{{- {({r + h})}} \cdot T}} \right)}{h + r}} & (15)\end{matrix}$

Noting that e^(−r·t) is a valid zero coupon risk free discount factorfor 0≦t≦T, equation (15) provides a formula for the clean value of aCDS.

As will be described now, swap rates may be linked to zero coupon rates.In the discussion above, it was assumed that a constant interest rate rexists that can be used to derive risk free discount factors applicablefor times between t=0 and t=T. In an alternative embodiment, risk freeinterest rates are a function of t, i.e. r=r(t).

In this case, a constant value of r may be derived so that the equation(7) can be used without the need to consider the term structure ofinterest rates. This derivation may be done by considering swap rates.

Two bonds B₁ and B₂ may be exemplarily considered for this purpose:

B₁ pays continuously compounded (roughly means pays 1 day libor at theend of every day). At maturity T, B₁ pays the notional value N. It is tobe noted that the present value of a bond paying libor coupons may beunaffected by the frequency with which the coupons are paid. Therefore,B₁ may have the same value regardless of whether coupons are paid daily,monthly, semi-annually or annually.

B₂ pays interest S on coupon dates t₁, t₂ . . . T, and notional value Nat maturity, T. It may be assumed that t_(i+1)−t_(i)=t′.

S may be the swap rate for maturity T when the value of the first bondB₁ equals the value of the second bond B₂. Considering the value of B₁to be

$\begin{matrix}{B_{1} = {{\int_{0}^{T}{{r \cdot {\mathbb{e}}^{{- r} \cdot t}}{\mathbb{d}t}}} + {N\;{\mathbb{e}}^{{- r} \cdot T}}}} & (16)\end{matrix}$

this can be written as

$\begin{matrix}\begin{matrix}{B_{1} = {{\int_{0}^{t_{1}}{{r \cdot {\mathbb{e}}^{{- r} \cdot t}}{\mathbb{d}t}}} + {\int_{t_{1}}^{t_{2}}{{r \cdot {\mathbb{e}}^{{- r} \cdot t}}{\mathbb{d}t}}} +}} \\{{\int_{t_{2}}^{t_{3}}{{r \cdot {\mathbb{e}}^{{- r} \cdot t}}{\mathbb{d}t}}} + \ldots + {\int_{T - t^{\prime}}^{T}{{r \cdot {\mathbb{e}}^{{- r} \cdot t}}{\mathbb{d}t}}} + {N\;{\mathbb{e}}^{{- r} \cdot T}}}\end{matrix} & (17)\end{matrix}$

Carrying out the integration results inB ₁=(1−e ^(−r·t′))·(1+e ^(−r·t′) +e ^(−2r·t′) + . . . +e^(−r·(T−t′)))+Ne ^(−r·T)  (18)

Similarly, the value of B₂ may be given byB ₂=(Se ^(−r·t′))·(1+e ^(−r·t′) +e ^(−2r·t′) + . . . +e ^(−r·(T−t′)))+Ne^(−r·T)  (19)

Setting B₁=B₂ leads to(1−e ^(−r·t′)) =Se ^(−r·t′)  (20)

In case t′=1, i.e. if S is quoted on an annual basis:r=ln(1+S)  (21)

In case t′=½, i.e. if S is the amount paid per semi annual coupon date,and the quoted swap rate (quoted on an annualized basis) would be S′=2S,r=ln [(1+S′/2)²]  (22)

In general, the use of a time-independent parameter r to value thedefault swap may be assumed to be reasonably accurate. Accuracy maysuffer when the risk free interest rate yield curve is not selfconsistent within maturities from 0≦t≦T.

Referring now to the annexed tables, an example is given of how theabove described embodiments can be used. It is noted that one way ofimplementing the invention is to use spreadsheet software that has beenspecifically programmed to calculate the daily margin payments. Otherapproaches are possible where dedicated software is developed to realizethe technique of the embodiments.

In the tables, TAB. 1 shows calculation results according to a firstembodiment where the default swap is calculated from an averaged spread.TAB. 2 is a table showing intermediary calculation results for obtainingthe data of TAB. 1. TABs. 3 to 5 are corresponding tables according to asecond embodiment where the default swap is calculated from a sum of theindividual spread values.

Discussing first the embodiment of TABs. 1 and 2, the function ofexpression (2) prior to the occurrence of a credit event may be realizedby the following visual basic code:

(i) Function cds(creditspread As Double, strike As Double, recovery AsDouble, maturity As Double, swap As Double, daycount As String) AsDouble (ii) ‘James Wood's formula (iii) Dim h, r, a, D, b As Double (iv)If daycount = “act360” Then D = 365/360 (v) If daycount = “30360” Then D= 1 (vi) If daycount = “act365” Then D = 1 (vii) r = Log(1 + swap)(viii) h = (creditspread/(1 − recovery)) * D (ix) a = (creditspread −strike)/(h + r) (x) b = 1 − Exp(−(h + r) * maturity) (xi) cds = a * b(xii) End Function

It is to be noted that the embodiment is not limited to the use of thementioned James Wood's formula. In other words, the CDS function may beany general function type that returns a value close to the cleanpresent value of a default swap.

This function is a generic formula that has the property that its outputis a close approximation to the clean present value of a credit defaultswap. The shown visual basic implementations have been used to obtainthe data of TAB. 1.

The following item types may be distinguished when performing thecalculation process of the present embodiment: inputs, input validitychecks, variables (data), variables (formulae and processes), andoutputs.

Examples of the input type are the date of current trading day, thecredit spread for each obligor, and the swap rate quotes. The inputvalidity check type may include, for instance, the check of swapmaturities and the check of summation of weights. Variables (data) are,for example, the recovery rate, the futures maturity, the contractnotional, the daycount, the additional maturity of notional default swap(after maturity of futures contract), the maturities and the sources ofswap rates that will be interpolated to calculate the exact swap rate,the number of obligors (which may be any integer equal to or greaterthan 1), and the weight of each obligor in the index. Variables(formulae and processes) may be the (e.g. linear) interpolation methodused to calculate the swap rate, and the exact formula used to evaluatethe CDS function. An example of an output is, e.g., the daily marginpayment.

Thus, “input parameters” are parameters which the user may be obliged toprovide on a day to day basis. “Variables”, whether data orformulae/processes, relate to details/options relating to how thecontract of the embodiments will finally be structured. The value ofeach variable would be determined in the contract documentation, i.e. onthe launch date of the futures contract.

Referring now to TAB. 2, the right-hand side of the table gives in thefirst line (or row) the identity of each obligor in the basket on thefutures launch date. The number of obligors in the present sample basketis 100, although only nine of them are shown in TAB. 2. It is noted thatin further embodiments, the number of obligors is a variable and may beadjusted to any positive integer value (including one). Thecorresponding weights of each obligor in the index are shown in thesecond line of TAB. 2. It is noted that the summation of all the weightsis one.

In the table, the first column provides the trade date. The trade datemay be filled each day by the user. The trade date may be automaticallytaken from TAB. 1. All data in each row is data that was observable ondate indicated in the first column.

The group of data on the right-hand side of the table gives the creditspreads for each obligor for each date, i.e. the respective data givesthe credit spread observable on the respective trading date or therespective obligor with identity as shown in the first line of TAB. 2.On any date, input “d” instead of a credit spread indicates that anobligor suffered a credit event before the end of that date.

The table further indicates, for each trading day, the calculatedweighted average credit spread for the obligors that had not suffered acredit event by the end of that date. Further, the calculated notionalof the underlying default swap is provided for each trading day, basedupon the number of defaults and the weights of each defaulted obligor.

In an automated approach such as a spreadsheet or dedicated softwaresolution, the user fills in the input fields on each trading day forthat day, i.e. credit spreads for each obligor in the basket anddefaults, and the trading day. As described above, the trading day maybe taken from TAB. 1. Consequently on a given date, the lines below willbe blank.

The example of TABs. 1 and 2 has been based on the following parameters:

Recovery rate 40% Maturity 20 Dec. 03 Contract notional 10.000.00Daycount Act360 Post futures CDS maturity 5 DC 0.002778

It is to be noted that all obligors may have the same assumed recoveryrate, i.e. 40% in the present example. In another embodiment, theobligors may have different recovery rates.

Referring now again to TAB. 1 and the above shown table indicating theunderlying parameters, the recovery rate built into the contractaccording to the embodiments may be used to calculate the definedpayment received by the protection buyer following a credit event. Forexample if the recovery rate is 40% in an index with 100 equallyweighted names and total notional size

100, the amount paid following a credit event on one name will be

0.60.

The maturity of the futures contract is also provided, e.g. 20 Dec.2003. The additional maturity of the underlying default swap, i.e. thematurity of the underlying default swap after the maturity of thefutures contract, may for instance be equal to 5 years.

There are further provided the total notional of the contract, and thedaycount fraction that is used in order to calculate the value of thefunction ‘CDS’ and for calculating the daily premium payment. In thepresent embodiment, the daycount may be set to ‘act360’, ‘30360’ or‘act365’ (see glossary and the visual basic example above). The DC valuemay be set to 1/360 if the daycount is ‘act360’ or ‘30360’, or to 1/365if the daycount is ‘act365’.

In TAB. 1, the first column indicates the trade date. All date in eachline is data that was observable on, or relevant to, the respectivetrade date. The second column gives the calculated calendar daysremaining before the future matures.

The columns “Swap rate 1”, “Maturity 1”, “Swap rate 2”, and “Maturity 2”keep data permitting the calculation of the interpolated swap rate (akey model input). “Swap rate 1” is the quoted interest rate swap ratefor the maturity given in “Maturity 1”. “Swap rate 2” is the quotedinterest rate swap rate for the maturity given in “Maturity 2”. Theexact method used to interpolate may be defined to be a variable and canbe any generally accepted method such as linear interpolation or cubicsplines. In the example of TAB. 1, linear interpolation was used. Thetable further includes a column containing a check that the swap ratematurities “Maturity 1” and “Maturity 2” are acceptable.

When implementing TABs. 1 and 2 as separate spreadsheets, TAB. 1 mayinclude input fields allowing the spreadsheet outputs to be calculatedwithout reference use the spreadsheet of TAB. 2. This may apply inparticular to the survived average credit spread and the survivednotional for each trading day. Thus, the user may be allowed to inputthese two quantities directly, each as a single number. The survivedaverage credit spread and the survived notional for each trading day maytherefore be fed into the cash flow calculations, either taking asinputs the information in TAB. 1 or TAB. 2.

The survived notional may be defined as the summation of weights of theobligors in the index that have not suffered a credit event by the endof the respective date. The summation may be in the same units as thesummation of the original index weights. ΔN gives the decrease insurvived notional that occurred on any trading day, as a result of theoccurrence of a credit event.

The columns “Present value from change in credit spreads”, “Defaultpayment”, and “Premium payment” provide three components of the dailycash flow. Each component of present value may be based on the contractnotional, see table above. “Present value from change in credit spreads”is the present value of the underlying default swap that arises becausethe average credit spread currently observed differs from the initialaverage credit spread. This value may be calculated as follows:N_(today)·CDS(CS_(average, today), CS_(average, initial), S_(today),M_(today))  (23)

“Default payment” is the default cash flow, paid at the end of a day onany names that suffered a credit event on that day. These values may becalculated as follows (where the summation is taken over all obligorsthat suffered a credit event on that trading day):Σ(n_(i)·LGD_(i))  (24)

“Premium payment” is the payment made by the protection buyer for creditprotection on the respective day. The protection payment may only beapplied to names that had not suffered a credit event by the close oftrading day. For one day, the premium payment may be calculated asfollows:N_(today)·CS_(yesterday)· 1/360 if the daycount is act360 or 30360  (25)orN_(today)·CS_(yesterday)· 1/365 if the daycount is act365.  (26)

If the number of days between the current trading date and the nexttrading date is greater than or equal to two (i.e. there is a weekendand/or bank holiday), the protection payment for the weekend and/or bankholiday period may be paid by the protection buyer at the close oftoday, in addition to the premium payment for today. For example, on aFriday evening, the protection seller may pay for three days ofprotection: Friday, Saturday and Sunday.

The “Daily margin” column gives the net daily payment from theperspective of a receipt by the protection buyer. This amount isreceived by the protection buyer if positive or paid by the protectionbuyer if negative. This value is calculated as:

$\begin{matrix}\begin{matrix}{{{default}\mspace{14mu}{margin}} = {{{present}\mspace{14mu}{value}\mspace{14mu}{of}\mspace{14mu}{today}} -}} \\{\mspace{185mu}{{{present}\mspace{14mu}{value}\mspace{14mu}{of}\mspace{14mu}{last}\mspace{14mu}{trading}\mspace{14mu}{day}} +}} \\{\mspace{185mu}{{{default}\mspace{14mu}{payment}} - {{premium}\mspace{14mu}{payment}}}}\end{matrix} & (27)\end{matrix}$

The last column shows the total of the daily cash flows received by theprotection buyer since the start of the futures contract.

Turning now to the embodiment of TABs. 3 to 5 where the default swap iscalculated from a sum of the individual spread values, the function ofexpression (2) may be realized by the following visual basic code:

(i) Function cds(creditspread As Double, strike As Double, recovery AsDouble, maturity As Double, swap As Double, daycount As String) AsDouble (ii) ‘James Wood's formula (iii) Dim h, r, a, D, b As Double (iv)If daycount = “act360” Then D = 365/360 (v) If daycount = “30360” Then D= 1 (vi) If daycount = “act365” Then D = 1 (vii) r = Log(1 + swap)(viii) h = (creditspread/(1 − recovery)) * D (ix) a = (creditspread −strike)/(h + r) (x) b = 1 − Exp(−(h + r) * maturity) (xi) cds = a * b(xii) End Function

It is to be noted that the embodiment is not limited to the use of thementioned James Wood's formula. In other words, the CDS function may beany general function type that returns a value close to the cleanpresent value of a default swap.

The example of TABs. 3 to 5 has been based on the same parameters asindicated above.

Referring now first to TABs. 3 and 5, these tables mainly correspond toTABs. 1 and 2 of the first embodiment. However, TAB. 5 contains a column“Survived initial premium” holding the calculated survived initialpremium for each trading day, i.e. the premium due to default swapswhere obligors have not suffered a credit event prior to the end of thatdate. The column “N(today)” contains the calculated total survivingweight for each trading day, i.e. the total weight due to default swapswhere obligors have not suffered a credit event prior to the end of thatdate.

This data corresponds to the column “Total survived weight (N)” in TAB.3. The total survived weight is the summation of weights of the obligorsin the index that have not suffered a separation event by the end of therespective trading date. The summation may be in the same units as thesummation of the original index weights. Column “ΔN” gives the decreasein survived notional that occurred on any trading day, due to theoccurrence of a credit event.

The columns “Present value from change in credit spreads”, “Defaultpayment”, and “Premium payment” give the three components of the dailycash flow. Each component of present value is based on the contractnotional, as shown in the parameters table above. The “Present valuefrom change in credit spreads” is the total present value of theunderlying default swaps (that have not suffered a credit event) thatarises because credit spreads currently observed differs from initialcredit spreads. This value is calculated as follows:−Σn_(i, today)·CDS(CS_(i, today), CS_(i, initial), S_(today),M_(today))  (28)

The value is set equal to the sum of the underlying CDS values of thegroup shown in each line of TAB. 4. Each cell in this group calculatesthe clean present value of one of the underlying default swaps, on therespective trading day. For example, the clean present value of thedefault swap on the 1^(st) obligor on 24.06.03 is 4.43. Fordays/obligors where a credit event has taken place, the value of thecredit default swap in the line of TAB. 4 is set to zero.

The “Default payment” is the default cash flow, paid at the end of a dayon any names that suffered a credit event on that day. The value iscalculated as follows (where the summation is taken over all obligorsthat suffered a credit event on that day):Σ(n_(i)·LGD_(i)  (29)

The “Premium payment” is the payment made by the protection buyer forcredit protection on the respective day. The protection payment is onlyapplied to names that had not defaulted by the close of trading day. Forone day, the value is calculated as follows:Σn_(i, today)·CS_(i, initial)·DC  (30)

where DC= 1/360 if the daycount is act360 or 30360, or 1/365 if thedaycount is act365.

In the following, two intra day examples are provided showing how theinvention can be used in the process of daily trading.

In the first example, a market participant buys protection at 10 am whenthe weighted average index spread is 105 bp, then sells protection at 3pm when the weighted average index spread is 110 bp. No defaults havetaken place.

Tonight's margin (10 am-3 pm) is given as follows.

The margin payment received by the buyer of protection at the end ofthat trading day is

22.91.

This sum is comprised of:

Present value closing trade of default  45.91 swap at 3 pm @110 bp Lessinitial present value opening trade (23) of default swap at 10 am @105bp Premium payment   0 Default payment   0

The opening and closing present values are calculated using the CDSformula.

The premium is zero because the position is not held overnight (premiumis only paid where the protection buyer holds protection overnight). Thedefault payment is zero because (a) there is no default on that day and(b) even if there was, default payments are only paid to protectionbuyers that hold a futures position overnight.

In the second example, a market participant bought protection at 10 amyesterday when the weighted average index spread is 105 bp, then sellsprotection at 3 pm today when the weighted average index spread is 110bp. Yesterday's closing credit spread was 111 bp. No defaults have takenplace.

Discussing first the yesterday's margin (at close). The margin paymentreceived by the buyer of protection on yesterday's close was

27.20.

This sum is comprised of:

Present value settlement of default swap  50.48 at close @111 bp Lessinitial present value opening trade (23) of default swap at 10 am @105bp Premium payment  (0.2778) Default payment  0

The opening and settling present values are calculated using the CDSformula. The premium is not zero because the position was held overnight(premium is only paid where the protection buyer holds protectionovernight). The default payment is zero because there was no default onthat day.

For today's margin (yesterday's close to 3 pm today), the margin paymentreceived by the buyer of protection at today's close was −

4.59.

This sum is comprised of:

Present value closing trade of default  45.89 swap at 3 pm @110 bp Lesspresent value settlement of default (50.48) swap at yesterday's close@111 bp Premium payment   0 Default payment   0

The settling and closing present values are calculated using the CDSformula.

The premium is zero because the position is not held overnight (premiumis only paid where the protection buyer holds protection overnight). Thedefault payment is zero because (a) there is no default on that day and(b) even if there was, default payments are only paid to/levied fromusers that hold a futures position overnight.

Given the above described embodiments, an advantageous technique isprovided that greatly improves over the approaches described by theprior art. Credit spreads, which are the most important input to thevaluation formula for the underlying default swap, evolve rapidly andcontinuously. The complexity of the valuation formula for the underlyingdefault swap means that the calculation of the present value could notbe carried out in the prior art by hand in a short enough time thatcredit spreads did not move. Furthermore, as in the first embodiment,one input to the valuation calculation is the average credit spread ofan index of (potentially a high number of) obligors where constituentsmay have different weightings, and it would be impossible to calculateby hand the average credit spread in a time short enough that creditspread did not move. The embodiments allow calculation of the underlyingdefault swap's present value in a time that is short enough that creditspreads do not move.

In the context of credit default swaps baskets, a construct may beconsidered to be a credit default swap, a bundle to be a basket, afailure risk to be the risk of a credit event occurring, and a resourceamount to be a premium payment and/or a default payment and/or a presentvalue.

When defining spread values to indicate the difference between acontinuously updated value of the respective construct and acontinuously updated value of a reference construct (for instance, inthe context of the first embodiment), a reference construct specifies asingle CDS with specific characteristics, which may be the basis for thecalculations by software. The software then needs a reference CDS toperform the present value calculation, the premium calculation anddefault payment calculation. The variables of the reference CDS may befed into a spreadsheet, being initial spread, recovery rate, expiry ofthe contract, CDS maturity, contract nominal, and day count convention.

The credit spread used may be a weighted average credit spread,calculated based on the spreads and weights of each obligor in theindex. In general, this does not change the definition of the construct(it only changes the value of one of the inputs to the construct). Allsubsequent calculations may be dependent on the prior definition of thereference CDS at the point of listing the contract.

When defining spread values to indicate the difference betweencontinuously updated values of the respective constructs and thecontinuously updated values of a reference bundle of constructs (forinstance, in the context of the second embodiment), a reference bundleof constructs specifies a basket of CDS with specific characteristics,which may be the basis for the calculations by software. The softwarethen needs a reference basket of CDS to perform the present valuecalculation, the premium calculation and default payment calculation.The variables of the reference basket of CDS may be fed into aspreadsheet, being initial spreads, obligors, weighting of the obligors,recovery rates, expiry of the contract, CDS maturity, contract nominal,and day count convention. All subsequent calculations may be dependenton the prior definition of a reference basket CDS at the point oflisting the contract.

As mentioned above, a resource amount may be a premium payment and/or adefault payment and/or a present value. That is, the resource amount isa value/price to compensate for the transfer of default risk fromprotection buyer to protection seller, for instance:

Premium payments, which are based on the initially set spread (comparewith initial spread in reference bundle of constructs). This embodimentis calculating the premium payments on a daily basis taking intoconsideration holidays and weekends.

Default payments, which are based the weighting of the obligor and theLGD value for defaulted obligors. The LGD value itself is defined as(100% minus recovery rate), while the recovery rate in this embodimentmight be a predefined variable of the reference construct (firstembodiment discussed above) or reference bundle of constructs (secondembodiment discussed above). This technique is calculating the exact LGDpayment depending on stipulating a credit event and weighting of thedefaulted obligor as a one off payment.

Present value, which expresses the compensation for spread changes. Thepresent value may always be based on the comparisons of the spread(first embodiment discussed above) or spreads (second embodimentdiscussed above) which was agreed for the reference construct orreference bundle of constructs, respectively, and the current spread:i.e. in the first case the weighted average credit spread based on theindividual obligor credit spreads which are currently paid for theobligors in the index; in the second case, the current credit spread foreach individual obligor that is currently paid in the market. Thepresent value of the reference basket of CDS can be continuouslycalculated which is the basis for all margin calculations.

Describing now generally and in more detail how the initial LGD value isdetermined, i.e. how the recovery rate in equation (4) is defined, thefollowing three approaches are embodiments of the invention.

In one embodiment, LGD is a fixed amount that is the same for each andevery obligor. This amount may either be determined arbitrarily, or byreference to a dealer poll of LGDs for each of the individual obligorsin the index (e.g. taking a weighted average of answers from the dealerpoll). In this embodiment, the default payment may be determined byreference to this standard fixed LGD number.

In another embodiment, LGD is different for each obligor and isdetermined on the first day by reference to a dealer poll (or othermechanism). When equation (4) is applied to the first embodiment whereaverage spreads are used, ‘recovery’ means the 1−(weighted average LGDfor each obligor in the index). When following this approach, thedefault payment may be determined by reference to the initially fixedLGD for the defaulted obligor, where LGDs differ between each obligor.

In a third approach, an embodiment is provided where LGD is againdifferent for each obligor and is determined on the first day byreference to a dealer poll (or other mechanism). However, the weightedaverage LGD changes as obligors default. I.e. when equation (4) isapplied to the first embodiment where average spreads are used,‘recovery’ means the 1−(weighted average LGD for each obligor in theindex that has survived at the time of calculation). The default paymentmay be re-determined after the default by reference to some other meanse.g. a dealer poll.

In the first (i.e. the “average spread”) embodiment discussed above,where an average spread is used, the term “average spread” may beconsidered to describe an arithmetically weighted average of singleobligor credit spreads. The average spread is based on the non-defaultednames. The average spread might be calculated by software (if thespreads and weighting of the single obligors are available) or theaverage spread might be observed as a single number in the market (e.g.via an index or a fixing of the average spread). In an embodiment, bothpossibilities are implemented in one and the same technique.

When discussing events in the above techniques, the term “event” may beconsidered to describe a credit event, while there are different creditevents defined in the market (e.g. bankruptcy, failure to pay,restructuring etc.). An obligor has either experienced a credit event ornot for the purpose of the product.

In the first embodiment discussed above, depending on that information,a one off default payment may be triggered and the nominal of thecontract may be reduced by the weighting factor of the defaulted obligorfor the remaining life time of the contract. The reference construct isthen not disregarded as there is only one CDS.

In the second embodiment discussed above, a one off default payment maybe triggered, calculated based on the weight for the defaulted CDS andthe fixed LGD payment. Then the individual defaulted CDS may bedisregarded.

As described above, the embodiments may use weights. In the firstembodiment discussed above, “weights” may be understood to be weightingfactors of obligors relevant for determining average credit spread andthe nominal. Each obligor in the index may have its own weight. Softwarecan deal with equal and non-equal weighted baskets. The weighting couldalso be 100%, basically representing a single name CDS. In the secondembodiment discussed above, “weights” may be understood to be weightingfactors of each CDS in the CDS basket. Again, software can deal withequal and non-equal weighted baskets. The weighting could also be 100%,basically representing a single name CDS.

The embodiments described so far mainly deal with credit events in formof cash settlement for the defaulted nominal based on an extraordinaryLGD (loss given default) payment for the protection buyer. In someembodiments, the LGD value is determined by (100−recovery rate). Inalternative embodiments, the recovery rate could either be apre-specified number at contract listing or could be determined at thetime the credit event occurs, e.g. by a market poll.

An additional or alternative settlement process allows separating thedefaulted name from the existing index after the occurrence of aseparation event, described in the futures contract documentationindicating a severe degradation in an obligor's creditworthiness.Separation events could include credit events such as bankruptcy orrestructuring, or could be defined as the time when the credit spread ofan obligor first exceeds some maximum permitted threshold. Theseparation therefore allows trading the non-defaulted index names andthe defaulted name as two separate contracts. Also, the margining andquotation of the contracts might differ from the time the separation hastaken place. An example similar to those of TABs. 1 to 5 but dealingwith separation rather than with cash settlement is illustrated in TAB.6.

E.g. a futures contract with 100 equally weighted names and a nominalvalue of $/

100,000 experiences a failure event, in this example a bankruptcy (whichis also a credit event per the ISDA 2003 market standard creditderivative definitions). The defaulted name with a 1% weighting is thenseparated from the index and the index continues to trade with anunderlying nominal value of $/

99,000, based on the average credit spread of the 99 non-separatednames. The separated name is now traded based on the market's perceptionof what the LGD value will be with a nominal size of $/

1,000. At a later point in time, the LGD value may be formally fixed,e.g. by reference to a dealer poll. After the fixing process, there is afinal variation margin payment as there is no longer any uncertaintyover the LGD value, and trading in the contract on the separated nameceases. The expiry date of the futures contract with the non-defaultednames is not changed. However, the defaulted name might have a differentexpiry date, for example, three months after the maturity of thenon-defaulted contract, giving the market enough time to find avaluation for the recovery rate of the defaulted name and trade out ofthe contract. At expiry of such a contract, it is possible to eithercash settle or physically settle outstanding contracts, for example,based on a basket of deliverable bonds.

In case of physical settlement instead of LGD cash settlement forseparated contracts, the physical settlement can work in the followingmanner:

At expiry, the protection seller of the separated contract gets creditreference obligations delivered with the respective nominal (currentlytraded at recovery value in the market) and pays fixed price of 100% ofdelivered nominal. His net result is equivalent to LGD payment, i.e.100−recovery value (pays 100 for the credit reference obligation andsells the credit reference obligation immediately at the recoveryvalue).

At expiry, the protection buyer of the separated contract deliverscredit reference obligation out of a basket of reference creditreference obligations eligible for delivery against payment of 100% ofthe delivered nominal. He either got the credit reference obligationsanyway or buys them in the market for the expected recovery value. Hisnet result is equivalent to LGD payment, i.e. 100−recovery value, i.e.he receives 100 for the credit reference obligation, which he bought inthe market at the recovery value.

Such a separated contract might be quoted as LGD, and with changingrecovery value expectation the value of the contracts changes as well.The net effect should be the same as a LGD cash settlement butfacilitated through physical settlement of a reference against 100% pernominal payment.

The difference to a conventional futures contract is mainly that thedelivery of a bond is against payment of the final settlement price ofsuch contract (normally additionally adjusted by price factor), while inthe physical settlement of a separated credit reference obligation isagainst fixed price of 100% of the delivered nominal.

The following is a glossary of terms which may be used to betterunderstand the invention.

A “ 30/360 daycount basis” assumes that there are 360 days in a year and30 days in each month.

“ACT/360” is a day count convention used for many bonds and defaultswaps.

“Arbitrage” is the act of simultaneously buying and selling very similarfinancial instruments in different markets in order to profit from shortterm price differences between those markets.

An “asset swap” is the combination of the purchase of a fixed rate bondtogether with an interest rate swap where the fixed rates are paid (andthe fixed rate is the scheduled coupons of the purchased bond) andfloating rates are received.

A “basis point” is 0.01 percent, usually of an interest rate or a creditspread.

A “Binary default swap” is a credit default swap where the amount paidby the protection seller following a credit event is fixed and is not afunction of the recovery rate of the reference obligation after thecredit event.

“Bootstrapping” is a recursive process by which future interest ratescan be calculated from earlier interest rates. For example,bootstrapping may be used to determine the zero coupon rate from a knownyield curve for successive points in time.

“Cash settlement” is the process in which traders receive or pay thelosses or gains on a futures contract in cash. Cash settlement is analternative to the physical delivery of the goods specified in thefutures contract.

A “clean function” is a bond or default swap valuation which excludesaccrued interest. Accrued interest is interest owed but not yet paid forthe historic period between the last coupon date and the valuation date.

The “clean price” is the price of a bond or default swap, excludingaccrued interest.

A “clearing agent” or a “clearinghouse” is a type of exchange wheretransactions between brokers are executed.

A “contract specification” is the exact parameters (including pricingmodels and inputs, if any) of any futures contract.

A “corporate bond” is a debt obligation of a corporate issuer. Theinvestor in the corporate bond bears the risk that the corporate mightdefault on the payment obligation.

A “credit default swap” is a contract where the protection seller agreesto purchase from the protection buyer an obligation issued by areference entity for its par value after the occurrence of a creditevent. In return, the protection buyer agrees to pay a premium to theprotection seller until the earlier of the maturity of the creditdefault swap and the date of a credit event.

A “credit derivative” is a financial instrument that enables theisolation and separate transfer of credit risk. Credit derivatives havecredit contingent payoffs that are only triggered following a creditevent. For example, in a credit default swap, after a credit event, theprotection seller buys a defaulted bond from the protection buyer forits par value.

A “credit event” is an event that triggers the credit contingent paymentof a credit derivative. Standardized credit events are commonly traded,and include: bankruptcy, failure to pay, obligation default, obligationacceleration, repudiation/moratorium, and restructuring.

The “credit event announcement time” is the time after the close oftrading each day when the exchange formally announces the occurrence ofcredit events.

A “credit spread” is the difference (usually quoted in basis points)between the yield on a reference obligation and the yield on theequivalent risk free debt instruments of the same maturity.

A “counterparty” is one of two parties to an agreement. If two partiesagree to something, they are both a counterparty to the agreement, andthey may both be collectively referred to as the counterparties to theagreement. The terms agreement and contract may be used synonymously.

A “coupon” is a statement of interest owed that may be detached from abond and separately redeemed at a specified time.

“Discount factors” are numbers derived from a zero coupon curve that areused to determine the present value of one or more cash flows. Thus, adiscount factor d_(i) is the present value of $1 received in the futureat time i.

The “discount rate” is the rate used to calculate the present value offuture cash flows. Typically, the discount rate accounts for at leastthe interest that could be obtained in a relatively risk freeinvestment, such as a Treasury bill.

The “effective date” is the date and time at which parties havepreviously agreed to cash settle a futures contract.

“Equilibrium zero rates” are zero rates derived from the midpointbetween bid and asked quotes for a yield curve.

The “European Interbank Offered Rate” (EURIBOR) is a short term interestrate at which banks are willing to lend funds to other banks in theinterbank market. EURIBOR interest rates are determined by a group ofbanks located in Europe.

An “exchange” is an organization that brings together buyers and sellersof particular assets. Typically, the exchange makes rules that governparticipation and trading.

A “failure event” may be any event of severe deterioration of the valueof an individual reference construct. If a failure event leads to aseparation of a construct out of a bundle, the failure event may beconsidered to be a separation event.

“Forward interest rates” are the interest rates fixed today on loans tobe made at corresponding future dates.

A “future” is a standardized contract that is bought or sold,respectively, for future acceptance or delivery. It is also possible tocash settle futures contracts by reference to the fixing value of theunderlying financial instrument on the futures expiry date.

A “future time period” is a date and time that has not yet occurred.

A “futures contract” is an agreement to buy or sell a financialinstrument on a future date at a price that is fixed today.

A “futures exchange” is an organization that brings together buyers andsellers of futures contracts.

The “futures price” of an asset is the price of an asset today fordelivery in the future.

“To hedge” is to invest in a first asset to reduce the risk associatedwith a second asset. Generally, the value of the first and second assetsare related inversely, so that when the value of the first assetdecreases, the value of the second assets increases, and vice versa. Aperfect hedge results when the two sides of a hedge move together inexactly the same proportion.

A “hedge ratio” or “delta” is the number of units of an asset needed tohedge one unit of a liability.

The “implied zero curve” is a zero coupon curve derived from a coupon orswap curve.

“Interest rate risk” is the potential monetary gain or loss on afinancial instrument if interest rates changed from their current value.

The “International Money Market” (IMM) is the financial futures marketwithin the Chicago Mercantile Exchange.

“ISDA” is the International Swaps and Derivatives Association, the tradeorganization for the credit derivatives industry.

The “London Interbank Offered Rate” (LIBOR) is a short term interestrate at which banks are willing to lend funds to other banks in theinterbank market.

A “long position” is a position which has been purchased for value, asopposed to a position which has been sold.

“Loss given default” (“LGD”) is the amount paid by a protection sellerto a protection buyer in a credit default swap after a credit eventoccurs. Loss given default is defined as a loss on a reference debtinstrument, usually given as the par value less the recovery rate of thereference debt instrument observed after the credit event in the bondmarket. In addition, loss given default can be defined to be a binaryamount so that a fixed amount is paid out after a credit eventregardless of the actual post credit event recovery rate.

“Margin” is the amount of money that an exchange requires as deposit inorder for a dealer to maintain an account.

“Margining” is the practice of maintaining a minimum margin with anexchange. For example, if the account of the first dealer has decreasedby $10,000 from the previous time period in which margining occurred,the dealer pays the entity that oversees trading $10,000. For mostfutures contracts, margining occurs daily after the close of tradingbecause the contracts are marked-to-market.

“Marking to market” is the practice of calculating the profits andlosses on a contract at the end of each day and settling up between theexchange and the dealers. Most, if not all, futures contracts aremarked-to-market. Marking to market is also called daily settlement.

“Maturity” is the date and time at which the obligation represented by afinancial instrument terminates. For example, a 10 year bond issuedtoday matures 10 years from today.

The “net preset value” (NPV) of an investment is the sum of the presentvalue of all cash flows resulting from an investment.

“Netting” is the act of offsetting credit exposure between financialinstitutions.

Netting is also the process by which multiple obligations betweenparties are offset against one another to reduce (and minimize, ifpossible) the number of transactions required to fulfill the multipleobligations. For example, if a first dealer owes the second dealer $100,and the third dealer owes the first dealer $100, both obligations arenetted by a single payment of $100 from the third dealer to the seconddealer.

“Over-the-counter” (OTC) is an informal market that does not involve afutures exchange.

“To pay fixed” means to pay a fixed interest rate, usually as part of aninterest rate swap.

The “present value” (PV) is the value of a future sum of money today,based on a particular discount rate.

A “protection buyer” is a credit derivative user that wishes to reducecredit risk exposure to a specific reference entity and pays acounterparty to do so.

A “protection seller” is a credit derivative user that is willing totake on additional credit risk of a specific reference entity in returnfor an appropriate fee.

The “recovery rate” is the proportion of face value of debt that aninvestor would be able to recover (either through sale of the debt orthrough the liquidation process) following a credit event.

The “reference entity” is the issuer of the debt obligations referencedin a credit derivative trade.

The “repo rate” is the interest rate applicable to principal amountloaned as a result of a repurchase agreement.

A “repurchase agreement” or “repo” is a short-term loan agreement bywhich one party sells an asset to another party, but promises to buyback the asset at a specified time.

A “separation event” may be any event of some influence on a resourceamount update for counterbalancing a transfer of a failure riskpertaining to a bundle of constructs, potentially leading to a decision,when managing bundles of constructs that may individually fail, toseparate one or more individual constructs out of one or more of themanaged bundles. In an embodiment, a separation event corresponds to aserious degradation of the creditworthiness of an obligor. A separationevent could be defined to include credit events, and/or adverse changesin credit rating, and/or credit spreads exceeding predefined maximumthresholds. The occurrence of a separation event on an obligor causesthe futures contract to separate into two separately traded futurescontracts—one based on the bundle of non-separated obligors, and anotherbased on the separated obligor.

“Selling short” is the process of making a short sale.

A “short sale” is the sale of an asset that an investor does not own.The investor is obligated to buy the same amount of the asset that wassold short at a later date.

“Shorting” is the act of selling an asset which one does not own at thetime of sale.

“Spread” refers to an observable market price for the isolated creditrisk of a defined obligor expressed in yield basis points (creditspread).

“Survived” refers to names in the index that have not suffered a creditevent on or in the time prior to a valuation date.

“Stub calculations” are interest calculations relating to the period oftime, either before or after a defined date.

The “three month LIBOR rate” is the LIBOR rate for a three month loan.If a counterparty to an IRS pays floating interest based on the threemonth LIBOR rate, that counterparty makes an interest payment everythree months, the amount of which is determined by multiplying the thencurrent three month LIBOR rate by the notional amount.

“Trading desks” are the place where traders send and receive informationand execute trades.

A “transparent” price describes a price derived from standardized termsand a single pricing model that is generally applicable to allcircumstances.

A “Treasury” is a debt issued by the U.S. government. “Treasury bills”mature in less than a year, “Treasury notes” mature from one year tounder 10 years, and “Treasury bonds” take 10 or more years to mature.

“Treasury accrued interest” is the accrued interest on a Treasury bondfor a period of time.

“Values” may be the values of any data, which could be spreads, weights,and credit events. Those variables might be fixed parameters forcalculation purposes or might change over time. A value could also be aresult of a calculation.

“Variation margin” is the payment due to or from an exchange (usuallymade each trading day) as a result of the change in value of an exchangetraded contract.

A “yield” is a profit expressed as a percentage of the investment madeto achieve that profit. If a $100 investment pays $106 in a year, theannual yield is 6%.

A “yield curve” is the relationship between future interest rates andtime. A graph showing the interest yield of securities displaying thesame characteristics as government securities is known as a par couponyield curve. The U.S. Treasury yield curve is an example of a par couponyield curve.

The “yield spread” is the difference in yield between two fixed incomeinstruments.

A “zero-coupon bond” does not pay interest at periodic intervals;rather, it is issued at a discount from its par (or face) value and isredeemed at par. For example, a bond that costs $60, pays no interest,but is redeemable for $100 in 20 years, is a zero-coupon bond.

The “zero coupon discount factor” is the discount factor for a zerocoupon bond.

The “zero-coupon rate” is the yield on a zero-coupon bond. All couponbonds has an equivalent zero-coupon rate that is equal to the yield of azero coupon bond having an NPV equal to the coupon bond.

The “zero-coupon yield curve” or “zero coupon curve” is a graph orrelationship of the internal rate of return of zero-coupon bonds over arange of maturities.

“Zero rates” are zero coupon rates, usually derived from a par couponcurve, that are used to determine discount factors.

While the invention has been described with respect to the physicalembodiments constructed in accordance therewith, it will be apparent tothose skilled in the art that various modifications, variations andimprovements of the present invention may be made in the light of theabove teachings and within the purview of the appended claims withoutdeparting from the scope of the invention.

For instance, while binary payments were mentioned when describingembodiments, this should not be construed to exclude the additional oralternative possibility to have non-binary payments.

In addition, those areas in which it is believed that those of ordinaryskill in the art are familiar have not been described herein in order tonot unnecessarily obscure the invention described herein. Accordingly,it is to be understood that the invention is not to be limited by thespecific illustrative embodiments, but only by the scope of the appendedclaims.

TABLE 1 Futures Swap Average days Swap Swap maturity Interpolated creditDate remaining rate 1 Maturity 1 rate 2 Maturity 2 check swap ratespread 20.06.03 183.00 4.75% 5.00 5% 6.00 OK 4.8753% 1.000% 23.06.03180.00 4.75% 5.00 5% 6.00 OK 4.8733% 1.005% 24.06.03 179.00 4.75% 5.005% 6.00 OK 4.8726% 1.017% 25.06.03 178.00 4.75% 5.00 5% 6.00 OK 4.8719%1.025% 26.06.03 177.00 4.75% 5.00 5% 6.00 OK 4.8712% 1.036% 27.06.03176.00 4.75% 5.00 5% 6.00 OK 4.8705% 1.035% 30.06.03 173.00 4.75% 5.005% 6.00 OK 4.8685% 1.053% 01.07.03 172.00 4.75% 5.00 5% 6.00 OK 4.8678%1.048% 02.07.03 171.00 4.75% 5.00 5% 6.00 OK 4.8671% 1.046% 03.07.03170.00 4.75% 5.00 5% 6.00 OK 4.8664% 1.061% 04.07.03 169.00 4.75% 5.005% 6.00 OK 4.8658% 1.069% 07.07.03 166.00 4.75% 5.00 5% 6.00 OK 4.8637%1.081% 08.07.03 165.00 4.75% 5.00 5% 6.00 OK 4.8630% 1.099% 09.07.03164.00 4.75% 5.00 5% 6.00 OK 4.8623% 1.101% 10.07.03 163.00 4.75% 5.005% 6.00 OK 4.8616% 1.156% 11.07.03 162.00 4.75% 5.00 5% 6.00 OK 4.8610%1.154% 14.07.03 159.00 4.75% 5.00 5% 6.00 OK 4.8589% 1.155% 15.07.03158.00 4.75% 5.00 5% 6.00 OK 4.8582% 1.163% 16.07.03 157.00 4.75% 5.005% 6.00 OK 4.8575% 1.029% 17.07.03 156.00 4.75% 5.00 5% 6.00 OK 4.8568%1.000% 18.07.03 155.00 4.75% 5.00 5% 6.00 OK 4.8562% 1.021% Presentvalue from Total change survived in credit Default Premium Daily RunningDate weight (N) ΔN spreads payment payment margin total 20.06.03 100.00%0.00 23.06.03 100.00% 0.00% 2.54 0.00 0.2778 2.2577 2.2577 24.06.03100.00% 0.00% 8.06 0.00 0.2778 5.2504 7.5081 25.06.03 100.00% 0.00%11.75 0.00 0.2778 3.4042 10.9123 26.06.03 100.00% 0.00% 16.83 0.000.2778 4.8059 15.7182 27.06.03 100.00% 0.00% 16.26 0.00 0.8333 −1.407114.3111 30.06.03 100.00% 0.00% 24.58 0.00 0.2778 8.0472 22.3583 01.07.03100.00% 0.00% 21.93 0.00 0.2778 −2.9253 19.4330 02.07.03 100.00% 0.00%21.36 0.00 0.2778 −0.8479 18.5851 03.07.03 100.00% 0.00% 28.03 0.000.2778 6.3903 24.9754 04.07.03 100.00% 0.00% 31.76 0.00 0.8333 2.899127.8745 07.07.03 100.00% 0.00% 36.98 0.00 0.2778 4.9354 32.8100 08.07.03100.00% 0.00% 45.22 0.00 0.2778 7.9640 40.7739 09.07.03 100.00% 0.00%46.19 0.00 0.2778 0.6962 41.4702 10.07.03 100.00% 0.00% 71.04 0.000.2778 24.5739 66.0440 11.07.03 100.00% 0.00% 70.13 0.00 0.8333 −1.742564.3015 14.07.03 100.00% 0.00% 70.69 0.00 0.2778 0.2791 64.5806 15.07.03100.00% 0.00% 74.01 0.00 0.2778 3.0442 67.6248 16.07.03  99.00% 1.00%13.34 60.00 0.2750 −0.9493 66.6755 17.07.03  99.00% 0.00% 0.22 0.000.2750 −13.3935 53.2820 18.07.03  99.00% 0.00% 9.64 0.00 0.8250 8.593161.8751

TABLE 2 Weighted Obligor: Trading average credit 1 2 3 4 5 6 7 8 9 daysN(today) spread Weights: 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%1.00% 20.06.03 100.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%1.00% 1.00% 23.06.03 100.00% 1.01% 1.06% 0.97% 1.05% 0.83% 1.06% 1.06%0.80% 1.01% 1.17% 24.06.03 100.00% 1.02% 1.05% 1.11% 1.21% 0.82% 1.11%1.06% 0.84% 1.14% 0.99% 25.06.03 100.00% 1.03% 2.00% 1.07% 1.30% 0.91%0.94% 1.03% 0.87% 1.22% 0.95% 26.06.03 100.00% 1.04% 3.00% 0.87% 1.56%0.99% 1.00% 1.17% 0.89% 1.20% 0.93% 27.06.03 100.00% 1.04% 4.00% 0.95%1.43% 1.00% 0.90% 1.16% 0.82% 1.38% 1.01% 30.06.03 100.00% 1.05% 5.00%0.82% 1.61% 1.13% 0.91% 1.25% 0.86% 1.52% 1.14% 01.07.03 100.00% 1.05%6.00% 0.77% 1.37% 1.14% 0.95% 1.25% 0.95% 1.36% 1.00% 02.07.03 100.00%1.05% 7.00% 0.78% 1.21% 1.11% 1.15% 1.10% 1.03% 1.39% 0.93% 03.07.03100.00% 1.06% 8.00% 0.73% 1.25% 1.30% 1.08% 1.15% 0.86% 1.31% 0.99%04.07.03 100.00% 1.07% 9.00% 0.70% 1.34% 1.44% 1.05% 0.91% 1.02% 1.29%1.01% 07.07.03 100.00% 1.08% 10.00% 0.64% 1.26% 1.62% 1.03% 0.91% 0.90%1.33% 0.86% 08.07.03 100.00% 1.10% 11.00% 0.70% 1.13% 1.66% 1.01% 0.97%0.70% 1.53% 0.75% 09.07.03 100.00% 1.10% 12.00% 0.66% 0.85% 2.14% 1.08%0.79% 0.73% 1.55% 0.81% 10.07.03 100.00% 1.16% 15.00% 0.69% 0.91% 1.88%0.98% 0.77% 0.72% 1.60% 0.77% 11.07.03 100.00% 1.15% 15.00% 0.64% 1.09%1.77% 0.83% 0.80% 0.70% 1.65% 0.97% 14.07.03 100.00% 1.16% 15.00% 0.74%0.93% 1.52% 1.04% 0.80% 0.69% 1.76% 0.98% 15.07.03 100.00% 1.16% 15.00%0.80% 0.86% 1.73% 1.18% 0.84% 0.77% 1.97% 0.93% 16.07.03 99.00% 1.03% d0.82% 0.79% 2.05% 1.16% 0.85% 0.68% 1.78% 0.87% 17.07.03 99.00% 1.00% d0.76% 0.67% 2.13% 1.11% 0.94% 0.59% 1.87% 0.88% 18.07.03 99.00% 1.02% d0.96% 0.69% 2.26% 1.19% 0.99% 0.59% 1.72% 0.79% 21.07.03 99.00% 1.00% d0.98% 0.77% 2.28% 0.87% 1.08% 0.47% 1.78% 0.86%

TABLE 3 Futures Swap Total days Swap maturity Interpolated survived Dateremaining Swap rate 1 Maturity 1 rate 2 Maturity 2 check swap rateweight (N) 20.06.03 183.00 4.75% 5.00 5% 6.00 OK 4.8753% 100.00%23.06.03 180.00 4.75% 5.00 5% 6.00 OK 4.8733% 100.00% 24.06.03 179.004.75% 5.00 5% 6.00 OK 4.8726% 100.00% 25.06.03 178.00 4.75% 5.00 5% 6.00OK 4.8719% 100.00% 26.06.03 177.00 4.75% 5.00 5% 6.00 OK 4.8712% 100.00%27.06.03 176.00 4.75% 5.00 5% 6.00 OK 4.8705% 100.00% 30.06.03 173.004.75% 5.00 5% 6.00 OK 4.8685% 100.00% 01.07.03 172.00 4.75% 5.00 5% 6.00OK 4.8678% 100.00% 02.07.03 171.00 4.75% 5.00 5% 6.00 OK 4.8671% 100.00%03.07.03 170.00 4.75% 5.00 5% 6.00 OK 4.8664% 100.00% 04.07.03 169.004.75% 5.00 5% 6.00 OK 4.8658% 100.00% 07.07.03 166.00 4.75% 5.00 5% 6.00OK 4.8637% 100.00% 08.07.03 165.00 4.75% 5.00 5% 6.00 OK 4.8630% 100.00%09.07.03 164.00 4.75% 5.00 5% 6.00 OK 4.8623% 100.00% 10.07.03 163.004.75% 5.00 5% 6.00 OK 4.8616% 100.00% 11.07.03 162.00 4.75% 5.00 5% 6.00OK 4.8610% 100.00% 14.07.03 159.00 4.75% 5.00 5% 6.00 OK 4.8589% 100.00%15.07.03 158.00 4.75% 5.00 5% 6.00 OK 4.8582% 100.00% 16.07.03 157.004.75% 5.00 5% 6.00 OK 4.8575%  99.00% 17.07.03 156.00 4.75% 5.00 5% 6.00OK 4.8568%  99.00% 18.07.03 155.00 4.75% 5.00 5% 6.00 OK 4.8562%  99.00%21.07.03 152.00 4.75% 5.00 5% 6.00 OK 4.8541%  99.00% 22.07.03 151.004.75% 5.00 5% 6.00 OK 4.8534%  99.00% Present value from change incredit Default Premium Daily Running Date ΔN spreads payment paymentmargin total 20.06.03 0.00 23.06.03 0.00% 2.33 0.00 0.2778 2.0549 2.054924.06.03 0.00% 7.61 0.00 0.2778 4.9991 7.0540 25.06.03 0.00% 10.85 0.000.2778 2.9667 10.0207 26.06.03 0.00% 15.25 0.00 0.2778 4.1171 14.137927.06.03 0.00% 13.53 0.00 0.8333 −2.5560 11.5819 30.06.03 0.00% 20.170.00 0.2778 6.3631 17.9450 01.07.03 0.00% 16.02 0.00 0.2778 −4.424713.5203 02.07.03 0.00% 13.36 0.00 0.2778 −2.9390 10.5813 03.07.03 0.00%18.05 0.00 0.2778 4.4151 14.9964 04.07.03 0.00% 19.17 0.00 0.8333 0.284915.2814 07.07.03 0.00% 21.46 0.00 0.2778 2.0090 17.2904 08.07.03 0.00%26.45 0.00 0.2778 4.7148 22.0051 09.07.03 0.00% 24.50 0.00 0.2778−2.2248 19.7803 10.07.03 0.00% 40.05 0.00 0.2778 15.2716 35.051911.07.03 0.00% 39.04 0.00 0.8333 −1.8470 33.2049 14.07.03 0.00% 39.290.00 0.2778 −0.0283 33.1766 15.07.03 0.00% 42.68 0.00 0.2778 3.114736.2912 16.07.03 1.00% 11.87 60.00 0.2750 28.9109 65.2021 17.07.03 0.00%−0.33 0.00 0.2750 −12.4743 52.7279 18.07.03 0.00% 8.50 0.00 0.82508.0071 60.7350 21.07.03 0.00% −2.08 0.00 0.2750 −10.8503 49.884722.07.03 0.00% −0.67 0.00 0.2750 1.1269 51.0116

TABLE 4 1 2 3 4 5 6 7 8 9 10 — — — — — — — — — — 0.26 (0.13) 0.24 (0.78)0.28 0.27 (0.92) 0.03 0.80 0.40 0.21 0.49 0.95 (0.83) 0.52 0.27 (0.75)0.65 (0.02) 1.08 4.43 0.31 1.39 (0.42) (0.28) 0.14 (0.59) 1.01 (0.24)0.76 8.48 (0.59) 2.55 (0.06) (0.00) 0.77 (0.52) 0.93 (0.31) 1.50 12.20(0.21) 1.96 (0.01) (0.47) 0.71 (0.84) 1.73 0.03 1.60 15.59 (0.86) 2.740.61 (0.43) 1.16 (0.65) 2.36 0.62 2.32 18.71 (1.06) 1.69 0.65 (0.25)1.15 (0.23) 1.64 (0.00) 1.41 21.57 (1.04) 0.97 0.49 0.67 0.47 0.15 1.78(0.33) 0.03 24.20 (1.27) 1.12 1.38 0.36 0.68 (0.64) 1.43 (0.07) 0.3726.61 (1.41) 1.55 2.00 0.22 (0.40) 0.09 1.31 0.03 (0.69) 28.81 (1.70)1.19 2.78 0.13 (0.43) (0.46) 1.51 (0.65) (0.89) 30.85 (1.38) 0.60 2.950.04 (0.12) (1.41) 2.38 (1.16) (1.16) 32.72 (1.58) (0.67) 5.00 0.37(0.97) (1.25) 2.45 (0.87) (1.48) 37.49 (1.47) (0.43) 3.88 (0.08) (1.09)(1.29) 2.68 (1.07) (1.48) 37.48 (1.68) 0.42 3.42 (0.77) (0.91) (1.37)2.88 (0.12) (1.86) 37.46 (1.21) (0.32) 2.32 0.18 (0.94) (1.43) 3.39(0.08) (1.47) 37.45 (0.90) (0.65) 3.26 0.81 (0.74) (1.07) 4.28 (0.34)(1.36) — (0.83) (0.95) 4.58 0.72 (0.70) (1.48) 3.47 (0.58) (1.25) —(1.11) (1.55) 4.95 0.49 (0.27) (1.90) 3.82 (0.57) (1.27) — (0.17) (1.44)5.46 0.88 (0.03) (1.91) 3.22 (0.99) (1.08) — (0.08) (1.06) 5.55 (0.62)0.38 (2.47) 3.45 (0.63) (1.81) — 0.47 (0.93) 6.82 (0.51) (0.65) (2.47)2.55 (0.77) (1.93) — 0.70 (0.97) 5.21 (0.96) 0.19 (2.10) 2.54 (0.62)(1.88) 11 12 13 14 15 16 17 — — — — — — — 0.32 (0.08) (0.18) (0.34)(0.55) 0.05 0.19 0.91 0.33 (0.70) (0.02) (0.32) 1.08 0.48 0.91 (0.15)(1.42) 0.08 (0.08) 1.68 0.82 1.28 0.26 (1.37) (0.18) 0.47 0.88 (0.04)0.52 0.36 (1.43) (0.45) (0.23) 0.96 (0.45) 0.62 1.23 (1.16) (0.76)(0.87) 0.50 (0.22) 1.08 1.34 (0.76) (0.31) (1.03) 0.13 (0.87) 0.44 0.82(0.67) (1.17) (1.06) (0.18) (1.51) 0.93 0.68 (0.98) (1.91) (0.44) 0.20(1.42) 0.62 0.97 (1.24) (2.21) (0.59) (1.03) (1.50) 0.35 0.92 (1.48)(2.39) (1.29) (0.07) (1.45) 0.28 1.12 (1.33) (2.41) (1.13) (0.02) (1.07)0.33 0.77 (0.07) (2.62) (0.76) (0.76) (1.26) (0.43) 0.99 0.13 (2.39)(1.29) (0.70) (1.46) 0.10 (0.13) 0.79 (2.11) (1.29) (0.63) (0.90) (0.66)(0.53) 0.90 (2.09) (1.64) (0.76) (1.58) (1.26) (0.48) 1.27 (1.60) (1.39)0.14 (1.71) (1.61) (0.73) 1.89 (1.89) (1.65) 0.20 (1.41) (1.73) (0.67)0.64 (1.58) (0.98) (0.09) (1.48) (1.50) (0.51) 0.60 (1.95) (1.06) (0.08)(1.24) (1.21) (0.63) 0.29 (1.57) (1.15) (0.24) (1.27) (0.90) (0.74) 0.08(1.21) (1.27) (0.23) (0.91) (1.22) (0.83) 0.05 (0.68) (1.66) (0.74)(1.43)

TABLE 5 Survived Obligor: Trading initial 1 2 3 4 5 days N(today)premium Weights: 1.00% 1.00% 1.00% 1.00% 1.00% 0.01% 0.01% 0.01% 0.01%0.01% 20.06.03 100.00% 1.000% 1.00% 1.00% 1.00% 1.00% 1.00% 23.06.03100.00% 1.000% 1.06% 0.97% 1.05% 0.83% 1.06% 24.06.03 100.00% 1.000%1.05% 1.11% 1.21% 0.82% 1.11% 25.06.03 100.00% 1.000% 2.00% 1.07% 1.30%0.91% 0.94% 26.06.03 100.00% 1.000% 3.00% 0.87% 1.56% 0.99% 1.00%27.06.03 100.00% 1.000% 4.00% 0.95% 1.43% 1.00% 0.90% 30.06.03 100.00%1.000% 5.00% 0.82% 1.61% 1.13% 0.91% 01.07.03 100.00% 1.000% 6.00% 0.77%1.37% 1.14% 0.95% 02.07.03 100.00% 1.000% 7.00% 0.78% 1.21% 1.11% 1.15%03.07.03 100.00% 1.000% 8.00% 0.73% 1.25% 1.30% 1.08% 04.07.03 100.00%1.000% 9.00% 0.70% 1.34% 1.44% 1.05% 07.07.03 100.00% 1.000% 10.00%0.64% 1.26% 1.62% 1.03% 08.07.03 100.00% 1.000% 11.00% 0.70% 1.13% 1.66%1.01% 09.07.03 100.00% 1.000% 12.00% 0.66% 0.85% 2.14% 1.08% 10.07.03100.00% 1.000% 15.00% 0.69% 0.91% 1.88% 0.98% 11.07.03 100.00% 1.000%15.00% 0.64% 1.09% 1.77% 0.83% 14.07.03 100.00% 1.000% 15.00% 0.74%0.93% 1.52% 1.04% 15.07.03 100.00% 1.000% 15.00% 0.80% 0.86% 1.73% 1.18%16.07.03 99.00% 0.990% d 0.82% 0.79% 2.05% 1.16% 17.07.03 99.00% 0.990%d 0.76% 0.67% 2.13% 1.11% 18.07.03 99.00% 0.990% d 0.96% 0.69% 2.26%1.19% 21.07.03 99.00% 0.990% d 0.98% 0.77% 2.28% 0.87% Obligor: Trading6 7 8 9 10 11 12 days 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.01%0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 20.06.03 1.00% 1.00% 1.00% 1.00%1.00% 1.00% 1.00% 23.06.03 1.06% 0.80% 1.01% 1.17% 1.09% 1.07% 0.98%24.06.03 1.06% 0.84% 1.14% 0.99% 1.24% 1.20% 1.07% 25.06.03 1.03% 0.87%1.22% 0.95% 1.16% 1.20% 0.97% 26.06.03 1.17% 0.89% 1.20% 0.93% 1.33%1.28% 1.06% 27.06.03 1.16% 0.82% 1.38% 1.01% 1.35% 1.11% 1.08% 30.06.031.25% 0.86% 1.52% 1.14% 1.51% 1.13% 1.27% 01.07.03 1.25% 0.95% 1.36%1.00% 1.31% 1.24% 1.29% 02.07.03 1.10% 1.03% 1.39% 0.93% 1.01% 1.10%1.18% 03.07.03 1.15% 0.86% 1.31% 0.99% 1.08% 1.20% 1.15% 04.07.03 0.91%1.02% 1.29% 1.01% 0.85% 1.14% 1.21% 07.07.03 0.91% 0.90% 1.33% 0.86%0.81% 1.08% 1.20% 08.07.03 0.97% 0.70% 1.53% 0.75% 0.75% 1.06% 1.25%09.07.03 0.79% 0.73% 1.55% 0.81% 0.68% 1.07% 1.17% 10.07.03 0.77% 0.72%1.60% 0.77% 0.68% 0.91% 1.22% 11.07.03 0.80% 0.70% 1.65% 0.97% 0.60%1.02% 0.97% 14.07.03 0.80% 0.69% 1.76% 0.98% 0.68% 0.86% 0.88% 15.07.030.84% 0.77% 1.97% 0.93% 0.71% 0.73% 0.90% 16.07.03 0.85% 0.68% 1.78%0.87% 0.73% 0.65% 0.84% 17.07.03 0.94% 0.59% 1.87% 0.88% 0.73% 0.63%0.85% 18.07.03 0.99% 0.59% 1.72% 0.79% 0.77% 0.68% 0.89% 21.07.03 1.08%0.47% 1.78% 0.86% 0.61% 0.74% 0.86%

TABLE 6 Main bundle of default swaps First default swap to separatePresent Present value from value from change in change in credit DefaultPremium Credit credit Default Premium Daily Running Date N(today) ΔNspreads payment payment spread spreads payment payment margin total20.06.03 100.00% 0.00% 0.00 23.06.03 100.00% 0.00% 2.54 0.00 0.27782.2577 2.2577 24.06.03 100.00% 0.00% 8.06 0.00 0.2778 5.2504 7.508125.06.03 100.00% 0.00% 11.75 0.00 0.2778 3.4042 10.9123 26.06.03 100.00%0.00% 16.83 0.00 0.2778 4.8059 15.7182 27.06.03 100.00% 0.00% 16.26 0.000.8333 −1.4071 14.3111 30.06.03 100.00% 0.00% 24.58 0.00 0.2778 8.047222.3583 01.07.03 100.00% 0.00% 21.93 0.00 0.2778 −2.9253 19.433002.07.03 100.00% 0.00% 21.36 0.00 0.2778 −0.8479 18.5851 03.07.03100.00% 0.00% 28.03 0.00 0.2778 6.3903 24.9754 04.07.03 100.00% 0.00%31.76 0.00 0.8333 2.8991 27.8745 07.07.03 100.00% 0.00% 36.98 0.000.2778 4.9354 32.8100 08.07.03 100.00% 0.00% 45.22 0.00 0.2778 7.964040.7739 09.07.03 100.00% 0.00% 46.19 0.00 0.2778 0.6962 41.4702 10.07.03100.00% 0.00% 71.04 0.00 0.2778 24.5739 66.0440 11.07.03 100.00% 0.00%70.13 0.00 0.8333 −1.7425 64.3015 14.07.03 100.00% 0.00% 70.69 0.000.2778 0.2791 64.5806 15.07.03 100.00% 0.00% 74.01 0.00 0.2778 3.044267.6248 16.07.03 99.00% 1.00% 13.34 0.00 0.2750 5.00% 15.5082 — 0.0028−45.4439 22.1809 17.07.03 99.00% 0.00% 0.22 0.00 0.2750 6.00% 18.6173 —0.0028 −10.2871 11.8938 18.07.03 99.00% 0.00% 9.64 0.00 0.8250 7.00%21.4711 — 0.0083 11.4385 23.3323

1. A data processing system for managing futures contracts that arebased on a basket of credit default swaps as underlyings, the systemcomprising: a physical data storage medium configured for storing creditspread values for each credit default swap in one of a plurality ofbaskets for a plurality of individual valuation time instances for saidfutures contract; and a calculation processor connected to said datastorage medium that calculates a value of a futures contract for anindividual valuation time instance based on said credit spread values,wherein said calculation processor determines whether a separation eventhas occurred, wherein the separation event involves a single creditdefault swap, the separation event based on a failure event of a singleobligor of a first basket wherein at least one obligor remains that hasnot failed, wherein said calculation processor calculates, in case of noseparation event, a value of the futures contract that is based on saidfirst basket based on said credit spread values, and wherein saidcalculation processor generates, in case of said separation event, asecond basket of credit default swaps comprising all credit defaultswaps of said first basket except for said single credit default swapthat suffered the separation event, and calculates a value of a futurescontract that is based on said second basket based on said credit spreadvalues associated with said at least one obligor that has not failed. 2.The data processing system of claim 1, wherein said calculationprocessor further calculates, in case of said separation event, a valueof a futures contract that is based on the credit default swap thatsuffered the separation event.
 3. The data processing system of claim 1,wherein said first basket has an associated expiration time and saidcalculation unit associates, in case of said separation event, saidsecond basket with the expiration time associated with said firstbasket.
 4. The data processing system of claim 1, wherein saidcalculation processor further calculates, in case of said separationevent, a value of the credit default swap that suffered the separationevent.
 5. The data processing system of claim 4, wherein said firstbasket has an associated expiration time and said calculation processorassociates, in case of said separation event, the credit default swapthat suffered the separation event with an expiration time differentfrom the expiration time associated with said first basket.
 6. The dataprocessing system of claim 5, wherein said calculation processorassociates, in case of said separation event, the credit default swapthat suffered the separation event with an expiration time later thanthe expiration time associated with said first basket.
 7. The dataprocessing system of claim 4, wherein said calculation processor marginssaid second basket independently from the credit default swap thatsuffered the separation event.
 8. The data processing system of claim 4,wherein said calculation processor quotes said second basket and thecredit default swap that suffered the separation event independently. 9.The data processing system of claim 1, wherein said data processingsystem determines whether at least one of a basket and an individualcredit default swap have expired and discontinues managing at least oneof the respective basket and the individual credit default swap if it isdetermined that at least one of the basket and the individual creditdefault swap have expired.
 10. The data processing system of claim 1,wherein said calculation processor, in case of said separation event,discontinues calculating a value of the futures contract that is basedon said first basket.
 11. A data processing method for execution on acomputer data processing apparatus for managing futures contracts thatare based on a basket of credit default swaps as underlyings, the methodcomprising: storing, by a physical data storage medium, credit spreadvalues for each credit default swap in a basket for a plurality ofindividual valuation time instances for said futures contract; andcalculating, using a calculation processor, a value of a futurescontract for an individual valuation time instance based on said creditspread values, wherein said calculation comprises: determining, usingsaid calculation processor, a separation event involving a single creditdefault swap based on a failure event of a single obligor of a firstbasket wherein at least one obligor remains that has not failed, in caseof no separation event, calculating a value of the futures contract thatis based on said first basket based on said credit spread values, and incase of said separation event, generating, using said calculationprocessor, a second basket of credit default swaps comprising all creditdefault swaps of said first basket except for said single credit defaultswap that suffered the separation event, and calculating a value of afutures contract that is based on said second basket based on saidcredit spread values associated with said at least one obligor that hasnot failed.
 12. The data processing method of claim 11, furthercomprising: in case of said separation event, calculating a value of afutures contract that is based on the credit default swap that sufferedthe separation event.
 13. The data processing method of claim 11,wherein said first basket has an associated expiration time and themethod further comprises: in case of said separation event, associatingsaid second basket with the expiration time associated with said firstbasket.
 14. The data processing method of claim 11, further comprising:in case of said separation event, further calculating a value of thecredit default swap that suffered the separation event.
 15. The dataprocessing method of claim 14, wherein said first basket has anassociated expiration time and the method further comprises: in case ofsaid separation event, associating the credit default swap that sufferedthe separation event with an expiration time different from theexpiration time associated with said first basket.
 16. The dataprocessing method of claim 15, further comprising: in case of saidseparation event, associating the credit default swap that suffered theseparation event with an expiration time later than the expiration timeassociated with said first basket.
 17. The data processing method ofclaim 14, further comprising: independently margining said second basketand the credit default swap that suffered the separation event.
 18. Thedata processing method of claim 14, further comprising: enablingindependent quotation of said second basket and the credit default swapthat suffered the separation event.
 19. The data processing method ofclaim 11, further comprising: determining whether at least one of abasket and an individual credit default swap have expired, anddiscontinuing managing at least one of the respective basket and saidindividual credit default swap if it is determined that at least one ofthe basket and the individual credit default swap have expired.
 20. Thedata processing method of claim 11, further comprising: in case of saidseparation event, discontinuing calculating a value of the futurescontract that is based on said first basket.
 21. A non-transitorycomputer-readable storage medium storing instructions that, whenexecuted by a processor, causes the processor to perform the followingsteps to manage futures contracts that are based on a basket of creditdefault swaps as underlyings by a method comprising: accessing aphysical data storage medium having stored therein credit spread valuesfor each credit default swap in a basket for a plurality of individualvaluation time instances for said futures contract; and calculating avalue of a futures contract for an individual valuation time instancebased on said credit spread values by determining a separation eventinvolving a single credit default swap based on a failure event of asingle obligor of a first basket wherein at least one obligor remainsthat has not failed, and in case of no separation event, calculating avalue of the futures contract that is based on said first basket basedon said credit spread values, and in case of said separation event,generating a second basket of credit default swaps comprising all creditdefault swaps of said first basket except for said single credit defaultswap that suffered the separation event, and calculating a value of afutures contract that is based on said second basket based on saidcredit spread values associated with said at least one obligor that hasnot failed.